Xcerra Corporation (NASDAQ:XCRA) and Cohu, Inc. (NASDAQ:COHU) are the two most active stocks in the Semiconductor Equipment & Materials industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect XCRA to grow earnings at a 16.00% annual rate over the next 5 years. Comparatively, COHU is expected to grow at a 10.00% annual rate. All else equal, XCRA’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Xcerra Corporation (XCRA) has an EBITDA margin of 6.66%, compared to an EBITDA margin of 10.51% for Cohu, Inc. (COHU). This suggests that COHU underlying business is more profitable. XCRA’s ROI is 0.60% while COHU has a ROI of 1.20%. The interpretation is that COHU’s business generates a higher return on investment than XCRA’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. XCRA’s free cash flow (“FCF”) per share for the trailing twelve months was +0.20. Comparatively, COHU’s free cash flow per share was +0.06. On a percent-of-sales basis, XCRA’s free cash flow was 0% while COHU converted 0% of its revenues into cash flow. This means that, for a given level of sales, XCRA is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. XCRA has a current ratio of 4.10 compared to 3.20 for COHU. This means that XCRA can more easily cover its most immediate liabilities over the next twelve months. XCRA’s debt-to-equity ratio is 0.07 versus a D/E of 0.04 for COHU. XCRA is therefore the more solvent of the two companies, and has lower financial risk.
XCRA trades at a forward P/E of 14.83, a P/B of 1.76, and a P/S of 1.45, compared to a forward P/E of 10.75, a P/B of 1.89, and a P/S of 1.58 for COHU. 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. XCRA is currently priced at a -7.12% to its one-year price target of $10.25. Comparatively, COHU is -24.92% relative to its price target of $24.00. This suggests that COHU 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 XCRA and 2.30 for COHU, which implies that analysts are more bullish on the outlook for XCRA.
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. XCRA has a beta of 1.61 and COHU’s beta is 0.89. COHU’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. XCRA has a short ratio of 2.72 compared to a short interest of 0.94 for COHU. This implies that the market is currently less bearish on the outlook for COHU.
Cohu, Inc. (NASDAQ:COHU) beats Xcerra Corporation (NASDAQ:XCRA) on a total of 8 of the 14 factors compared between the two stocks. COHU is growing fastly, generates a higher return on investment and has lower financial risk. COHU is more undervalued relative to its price target. Finally, COHU has better sentiment signals based on short interest.