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?
Hi,
Great blog.
In his book, Greenblatt does not normalize earnings, although in his other studies he may. Throughout his book and appendix, he uses current EBIT/Enterprise Value