Want to know which stocks are ripe for activist takeovers? Well, there’s a simple formula you can use, and it’s called the enterprise multiple.
In this week’s edition of Watchlist Wednesday, we use it to highlight five stocks.
The enterprise multiple is a value metric that compares a company’s enterprise value to its operating profit.
Stocks that have a low enterprise value relative to operating profits are often withholding shareholder value, and the opportunity to unleash this value makes these stocks attractive to activists.
– This article appeared first on The Stock Market Blueprint Blog.
Enterprise Multiple Description
The enterprise multiple is discussed at length in books such as What Works on Wall Street (1) by James O’Shaughnessy, Quantitative Value by Wesley Gray and Tobias Carlisle and Deep Value by Carlisle. It identifies undervalued, out-of-favor stocks with strong balance sheets.
Additionally, Tobias Carlisle uses extensive research to show this metric is used when identifying activist takeovers.
Rather than the more common price-to-earnings ratio, which uses market capitalization and net earnings, the enterprise multiple measures a company’s valuation based on its enterprise value to earnings before interest and taxes, or EBIT. Enterprise value is the cost to acquire an entire company. It differs from market capitalization because it accounts for a business’ debt and excess cash, not just equity.
Using EBIT in place of net earnings provides a clearer picture of a company’s operating profits. By not including interest or taxes, the metric compares the operational structure of the business, rather than letting a company’s financing and tax status cloud its profitability.
Here is the enterprise multiple formula:
– Enterprise Multiple = Enterprise Value/EBIT
– Enterprise Value = (Market Capitalization + Total Debt + Minority Interest + Preferred Stock) – (Cash, Cash Equivalents + Short-term Investments)
– EBIT = Earnings Before Interest and Taxes
5 Stocks Ripe for Activist Takeovers
According to Enterprise Multiple stock screen (2) on The Stock Market Blueprint, the following stocks have some of the lowest enterprise multiples among U.S. listed equities.
Molina Healthcare, Inc. (NYSE:MOH): Offers Medicaid-related solutions and assists government agencies with administration of the Medicaid program.
– Market Cap: $2.9 Billion
– Enterprise Value: $-243 Million
– EBIT (TTM): $388 Million
– Enterprise Multiple: -0.63
– Closing price on 11/22/16: $52.00
magicJack VocalTec Ltd (NASDAQ:CALL): Operates as a cloud communications company which allows users to make and/or receive free telephone calls with broadband internet access.
– Market Cap: $113 Million
– Enterprise Value: $61 Million
– EBIT (TTM): $21 Million
– Enterprise Multiple: 2.92
– Closing price on 11/22/16: $6.80