Pepsico, Inc. (NYSE:PEP) and Spectrum Pharmaceuticals, Inc. (NASDAQ:SPPI) are the two most active stocks in the Beverages – Soft Drinks industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
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 Return on Investment (ROI) as measures of profitability and return. PEP’s ROI is 13.80% while SPPI has a ROI of -17.80%. The interpretation is that PEP’s business generates a higher return on investment than SPPI’s.
If there’s one thing investors care more about than earnings, it’s cash flow. PEP’s free cash flow (“FCF”) per share for the trailing twelve months was +0.56. Comparatively, SPPI’s free cash flow per share was +0.01. On a percent-of-sales basis, PEP’s free cash flow was 1.27% while SPPI converted 0% of its revenues into cash flow. This means that, for a given level of sales, PEP is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. PEP has a current ratio of 1.30 compared to 3.10 for SPPI. This means that SPPI can more easily cover its most immediate liabilities over the next twelve months. PEP’s debt-to-equity ratio is 3.14 versus a D/E of 0.50 for SPPI. PEP is therefore the more solvent of the two companies, and has lower financial risk.
PEP trades at a forward P/E of 21.16, a P/B of 13.38, and a P/S of 2.67, compared to a forward P/B of 3.72, and a P/S of 6.05 for SPPI. PEP is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. PEP is currently priced at a -5.45% to its one-year price target of $124.38. Comparatively, SPPI is -18.26% relative to its price target of $11.50. This suggests that SPPI 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 2.20 for PEP and 1.50 for SPPI, which implies that analysts are more bullish on the outlook for PEP.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. PEP has a beta of 0.68 and SPPI’s beta is 1.35. PEP’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. PEP has a short ratio of 2.80 compared to a short interest of 10.91 for SPPI. This implies that the market is currently less bearish on the outlook for PEP.
Pepsico, Inc. (NYSE:PEP) beats Spectrum Pharmaceuticals, Inc. (NASDAQ:SPPI) on a total of 7 of the 12 factors compared between the two stocks. PEP is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. Finally, PEP has better sentiment signals based on short interest.