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Should You Buy Syntel, Inc. (SYNT) or Virtusa Corporation (VRTU)?

Syntel, Inc. (NASDAQ:SYNT) and Virtusa Corporation (NASDAQ:VRTU) are the two most active stocks in the Information Technology Services industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect SYNT to grow earnings at a 9.33% annual rate over the next 5 years. Comparatively, VRTU is expected to grow at a 15.00% annual rate. All else equal, VRTU’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns



Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Syntel, Inc. (SYNT) has an EBITDA margin of 28.59%, compared to an EBITDA margin of 7.08% for Virtusa Corporation (VRTU). This suggests that SYNT underlying business is more profitable. SYNT’s ROI is -21.60% while VRTU has a ROI of 2.30%. The interpretation is that VRTU’s business generates a higher return on investment than SYNT’s.

Cash Flow 

Cash is king when it comes to investing. SYNT’s free cash flow (“FCF”) per share for the trailing twelve months was +0.72. Comparatively, VRTU’s free cash flow per share was -0.07. On a percent-of-sales basis, SYNT’s free cash flow was 0.01% while VRTU converted -0% of its revenues into cash flow. This means that, for a given level of sales, SYNT is able to generate more free cash flow for investors.




Liquidity and Financial Risk

Liquidity and leverage ratios are important because they reveal the financial health of a company. SYNT has a current ratio of 2.00 compared to 4.30 for VRTU. This means that VRTU can more easily cover its most immediate liabilities over the next twelve months.

Valuation

SYNT trades at a forward P/E of 10.65, a P/S of 1.67, compared to a forward P/E of 18.86, a P/B of 2.32, and a P/S of 1.21 for VRTU. SYNT is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. SYNT is currently priced at a -5.34% to its one-year price target of $19.67. Comparatively, VRTU is 3.92% relative to its price target of $36.00. This suggests that SYNT is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 3.00 for SYNT and 1.80 for VRTU, which implies that analysts are more bullish on the outlook for SYNT.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. SYNT has a beta of 1.13 and VRTU’s beta is 1.65. SYNT’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. SYNT has a short ratio of 10.43 compared to a short interest of 5.53 for VRTU. This implies that the market is currently less bearish on the outlook for VRTU.

Summary

Virtusa Corporation (NASDAQ:VRTU) beats Syntel, Inc. (NASDAQ:SYNT) on a total of 6 of the 12 factors compared between the two stocks. VRTU is more profitable, generates a higher return on investment and higher liquidity. Finally, VRTU has better sentiment signals based on short interest.

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