Find Value in the Aftermath

Given the unbelievable and seemingly never-ending turmoil we are experiencing in the markets, I believe that we will one day look back in awe about the bargains we missed. That's par for the course, and hindsight is 20/20. But it's still in our best interest to try to spot bargains before they are no longer cheap. Of course, in this market, panic and fear are ruling supreme, and it takes an iron stomach to put capital on the line in such uncertainty. But right or wrong, that's what value investors do.

To that end, I start with enterprise value in trying to determine the true value of a company. Market capitalization measures just the value of the common equity, but ignores the fact that debt holders have also provided capital to companies. Enterprise value considers debt along with equity market cap, and preferred stock, and subtracts out cash, the result of which is sometimes used as a proxy for the takeover value of a given firm. Enterprise value, which measures the value of the entire firm (in terms of capital structure), is more encompassing than market cap, which simply measures the market value of a firm's equity.

When used with EBITDA (earnings before interest, taxes, depreciation and amortization) as the denominator, a ratio of EV to EBITDA can act as a better indicator of a firm's profitability than a P/E ratio alone, especially for companies whose capital structure includes debt. All else being equal, of course, the lower EV/EBITDA, the better.

For the purposes of this screen, I searched for companies with market caps greater than $250 million trading at less than 10 times EV-to-EBITDA, both in their latest fiscal year as well as on a trailing-12-month basis. Companies also had to have a price-to-book ratio less than 1. After all, what could be better than a company trading a relatively low profitability multiples that also traded at low multiples of the value of its assets? I also included a debt screen, limiting total debt-to-equity to less than 50%.

Not surprisingly, the list my Bloomberg terminal generated was small, just 20 names. Some were very recognizable, while others have been the subject of previous columns I've written for RealMoney. Make no mistake; this list includes some beaten-down names that are struggling in the face of economic uncertainty.

Ticker	Company	Enterprise Value*	Market Cap*	Trailing EV/EBITDA TTM	Last Year EV/EBITDA	Price/Book	Debt/Equity	9/29/2008 Price
JAVA	Sun Microsystems	3.65	5.08	2.51	6.28	0.91	22.64	6.75
MHK	Mohawk	6.73	4.61	7.03	8.57	0.91	43.37	67.37
AVT	Avnet Inc	4.18	3.59	5.17	6.23	0.87	29.63	23.9
KG	King Pharmaceuticals	1.45	2.24	2.03	2.25	0.85	15.18	9.1
AVX	Avx Corp.	1.14	1.75	5.38	9.21	0.94	N.A.	10.23
ODP	Office Depot	2.32	1.56	4.78	8.83	0.48	27.98	5.68
TECD	Tech Data	1.43	1.48	5.26	8.12	0.76	21.55	29.34
WLK	Westlake Chemical	1.80	1.28	6.61	8.97	0.96	41.17	19.46
VSH	Vishay Intertech	1.20	1.17	2.63	8.04	0.44	22.69	6.28
BHE	Benchmark Electronics	0.67	0.95	5.22	8.4	0.75	0.97	14.28
ARRS	Arris Group	0.87	0.89	7.79	9.71	0.77	28.54	7.28
AM	American Greetings	1.13	0.80	7.31	6.79	0.9	46.97	16.37
FADV	First Advantage	0.83	0.74	5.26	7.12	0.83	8.27	12.51
OMG	Om Group	0.61	0.64	1.9	8.5	0.55	2.28	21.08
CBR	Ciber	0.56	0.40	7.21	9.16	0.92	40.81	6.74
MDTH	Medcath Corp.	0.40	0.34	4.69	9.57	0.93	40.59	17.61
MEI	Methode Electronics	0.23	0.34	2.51	5.06	0.87	N.A.	8.76
ZEUS	Olympic Steel	0.33	0.31	3.52	8.06	0.99	10.36	28.24
JRN	Journal Communications	0.48	0.27	4.96	6.16	0.6	47.54	5
CORE	Core-Mark Holdings	0.33	0.27	9.9	7.81	1	30.91	25.09
* $billions Source: Bloomberg

Here are some of the more interesting names:

Office Depot (ODP Quote - Cramer on ODP - Stock Picks): Stock of this office supply powerhouse has been trounced, down nearly 60% year to date and 73% in the past year. The past two quarters, sales have flattened or fallen slightly, and the bottom line has been hit dramatically.

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