Consistent Cash Creators, Part 4: Normalized EY

Last week I received a great suggestion for normalizing the earnings yield number I use to sort the list of Consistent Cash Creators. Instead of just using EBIT from the previous 12 months, I instead used the average EBIT over the past 7 years divided by enterprise value for today’s screen. The idea here is that using the average EBIT over the past 7 years will adjust for companies at the top or bottom of a particular industry cycle.

According to the comment I received, this is suppose to be what Joel Greenblatt does in his actual research. The logic seems to make sense, but I haven’t been able to confirm that Greenblatt actually normalizes earnings yield in this fashion. Does anyone have a reference to confirm this?

Regardless of whether Greenblatt normalizes EY in his research, it is worth looking at how normalizing EY over the past 7 years impacts the list of Consistent Cash Creators. Here are the results:

Company Ticker Normalized EY P/E P/FCF P/B ROIC R2
Ophthalmic Imaging Systems OISI 948.98 3.70 0 0.55 10.90 0.81
Remote Dynamics, Inc. RDYM 186.24 0.00 0 0 -100.00 0.84
Information Analysis Incorpora IAIC 96.99 9.70 4.1 1.71 29.40 0.75
Reliv’ International, Inc RELV 73.84 22.90 47.3 4.73 17.20 0.87
TROY Group, Inc. TROY 69.93 8.50 8.7 2.07 21.40 0.75
Daily Journal Corporation DJCO 68.08 10.10 11.2 2.55 17.90 0.71
Rural/Metro Corporation RURL 61.68 0.00 3.6 0 17.30 0.91
Wayside Technology Group, Inc. WSTG 58.59 12.00 20.4 1.74 11.40 0.85
Manpower Inc. MAN 54.51 9.80 16.6 1.69 14.50 0.79
Denny’s Corporation DENN 50.52 8.60 15 0 45.10 0.91
Pacer International, Inc. PACR 46.04 10.50 7.9 1.8 15.30 0.84
LoJack Corporation LOJN 45.80 11.20 7.9 2 12.20 0.82
iMERGENT, Inc. IIG 44.91 13.80 17 3.84 37.60 0.89
Adept Technology, Inc. ADEP 44.20 0.00 66.6 2.65 -48.00 0.87
Pepsi Bottling Group, Inc., Th PBG 42.97 15.00 16.9 2.94 11.70 0.83
LCA-Vision Inc. LCAV 39.86 7.50 21.2 2.47 26.40 0.81
Magna International Inc. (USA) MGA 38.27 12.00 10.6 0.9 6.70 0.72
Nam Tai Electronics, Inc. NTE 38.24 6.50 47.6 1.36 10.80 0.89
Sherwin-Williams Company SHW 36.65 11.50 12.7 4.5 25.40 0.72
Black & Decker Corporation, Th BDK 35.78 8.50 7.2 2.86 20.30 0.89
Aladdin Knowledge Systems Ltd. ALDN 34.90 18.30 14.3 2.17 9.30 0.96
Dynamex, Inc. DDMX 33.42 18.20 18.6 2.88 16.20 0.81
Tupperware Brands Corporation TUP 32.65 20.00 32 4.38 10.50 0.83
EZCORP, Inc. EZPW 31.72 13.20 12.6 2.23 15.50 0.94
Exxon Mobil Corporation XOM 31.59 11.70 16.4 3.81 30.90 0.88
Meredith Corporation MDP 31.46 11.30 10.1 2.29 14.90 0.87
TeraForce Technology Corp TERA 31.02 0.00 0 0 400.00 0.85
Toro Company, The TTC 30.87 12.30 11 4.56 25.50 0.82
Palomar Medical Technologies, PMTI 30.29 14.20 12.8 1.9 9.40 0.77
NutriSystem Inc. NTRI 28.54 4.80 5.8 3.34 72.10 0.71

First thing I notice is that NutriSystem (NTRI) is now at the bottom of the list now that the list is sorted by normalized EY instead of TTM EY. Another thing I notice is that the petroleum companies no longer dominate the top of the list. The fashion retails also dropped from the list this week. Do you notice any other patterns? Do the results from the Consistent Cash Creators screen look better sorted by normalized EY or did the previous list that was sorted by trailing twelve month EY look better?

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