Value stock or value trap? It's a question that all value-oriented investors have to answer after a cheap-looking stock comes up on their screens.
However, in the case of Goodyear Tire & Rubber (GT -2.17%), marine products company Brunswick (BC -0.89%), and tool maker Stanley Black & Decker (SWK -0.01%), it appears they are all good value stocks that investors may be overlooking.
Here's a look at why.
Image source: Getty Images.
Want a good value stock? Consider the EV/EBITDA multiple
First, here's a look at valuations using a consensus of Wall Street analysts' reports. In this case, I'm using the enterprise value (market cap plus net debt), or EV, to earnings before interest, taxation, depreciation, and amortization (EBITDA) ratio. It's a commonly used valuation metric, which includes consideration for debt.
That's a key point when comparing these three companies, because Goodyear and Stanley Black & Decker are making significant acquisitions in 2021, which will boost earnings, and in Goodyear's case, also boost debt.
As a rough rule of thumb, an EV/EBITDA multiple of 11 times to 12 times is considered a decent value for these industries. Higher multiples are expected in high-growth industries and lower multiples in industries with slow growth. Moreover, all three are forecast to trade on excellent valuations in the coming years, as you can see below.
| EV/EBITDA Multiple |
2020 |
2021* |
2022* |
2023* |
|---|---|---|---|---|
|
Stanley Black & Decker |
11.6 |
10.5 |
9.5 |
8.4 |
|
Brunswick |
8.7 |
7.5 |
6.6 |
5.6 |
|
Goodyear |
10.7 |
6.3 |
5.1 |
5.1 |
* = 2021-2023 figures are estimates. Data source: marketscreener.com, author's analysis.
1. Goodyear: Using an acquisition to build scale (and sales)
The tire industry is a mature industry that relies on demand for replacement tires and the original equipment manufacturer (OEM) market. Unfortunately, both are low-growth markets at best. Replacement demand is relatively stable (in line with miles driven in the economy), and the OEM market tracks global light vehicle production.
In such industries, it usually makes sense to try to squeeze every bit of profit margin possible to try to translate low-single-digit revenue growth into earnings growth. That's precisely what Goodyear is trying to do with its acquisition of Cooper Tire (CTB). In a nutshell, the No. 1 tire company in the U.S. is buying the No. 5 player in the U.S. and building the scale and global reach to get closer in revenue and EBITDA margin to global leaders: Japan's Bridgestone and France's Michelin.
Goodyear's management believes the acquisition (enterprise value of $2.5 billion) will build scale and geographical reach with $165 million in run-rate synergies generated within two years. The deal should add revenue and increase profit margins. Cooper is a good fit. This type of consolidation is exactly what a company in a mature industry needs.
The market is worried by the weak light vehicle OEM production figures in the last few years. But the reality is that 80% of Goodyear's sales go to the replacement market, and the OEM market will recover in the coming years.
Data by YCharts.
2. Brunswick: Looking to build on increased (and sustained) interest
The boat maker, marine outboard engine, and parts and accessories company is one of the net winners from the COVID-19 pandemic. The lockdown measures caused a well-documented surge in interest in home improvement, and also created interest in boating as a leisure activity.
The good news is that demand continues to be robust. For example, in the last earnings call, CEO David Foulkes said of the boat segment that "our 2021 production slots are now sold out for the calendar year, with five brands completely sold out through the 2022 model year."
In addition, management is "accelerating additional capacity investments" to meet surging demand in outboard engines. "Robust" aftermarket demand also caused the parts and accessories businesses to experience "significant topline and earnings growth" in the quarter.
Image source: Getty Images.
If there is a near-term concern around the company, it relates to the supply chain pressures and raw material cost price rises that have hit most other manufacturers. That said, Brunswick's valuation looks like it has a margin of safety built into it to handle any near-term disappointment. Moreover, new boat sales usually drive future aftermarket and outboard engine demand.
In addition, Brunswick's management believes the pandemic has created a new generation of younger boat owners, resulting in ongoing demand.
3. Stanley Black & Decker: Finding opportunity in surging demand
In common with Brunswick, Stanley Black & Decker saw surging demand during the pandemic as consumers took to DIY activity at home. However, the company is a lot more than a one-trick pandemic pony. Its professionally oriented brand sales are coming back as the economy reopens. Moreover, management continues to develop sales of the brands it purchased in recent years, such as Craftsman, Lenox, and Irwin.
Looking to the medium term, Stanley's acquisition of the remaining stake of lawn and garden products company MTD (80% for $1.6 billion) will catapult the company into a leading position in the category.
Image source: Getty Images.
Management has aggressive plans to expand MTD's margin and develop electrical products with it. In addition, management recently announced a deal to buy designer and manufacturer of commercial and residential turf care company Excel Industries for $375 million in cash.
All told, Stanley has many growth opportunities in the coming years, just as with Brunswick; its valuation looks like it's built to withstand some pressure from rising raw material prices.
