Albemarle Corporation (NYSE:ALB) and Photronics, Inc. (NASDAQ:PLAB) are the two most active stocks in the Specialty Chemicals industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect ALB to grow earnings at a 11.05% annual rate over the next 5 years. Comparatively, PLAB is expected to grow at a 10.00% annual rate. All else equal, ALB’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. Albemarle Corporation (ALB) has an EBITDA margin of 21.31%, compared to an EBITDA margin of 25.02% for Photronics, Inc. (PLAB). This suggests that PLAB underlying business is more profitable. ALB’s ROI is 7.80% while PLAB has a ROI of 6.10%. The interpretation is that ALB’s business generates a higher return on investment than PLAB’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. ALB’s free cash flow (“FCF”) per share for the trailing twelve months was -1.93. Comparatively, PLAB’s free cash flow per share was +0.03. On a percent-of-sales basis, ALB’s free cash flow was -7.97% while PLAB converted 0% of its revenues into cash flow. This means that, for a given level of sales, PLAB 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. ALB has a current ratio of 2.20 compared to 5.90 for PLAB. This means that PLAB can more easily cover its most immediate liabilities over the next twelve months. ALB’s debt-to-equity ratio is 0.46 versus a D/E of 0.09 for PLAB. ALB is therefore the more solvent of the two companies, and has lower financial risk.
ALB trades at a forward P/E of 23.00, a P/B of 3.40, and a P/S of 4.52, compared to a forward P/E of 16.35, a P/B of 0.73, and a P/S of 1.27 for PLAB. ALB is the expensive of the two stocks on an earnings, book value and sales basis. 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. ALB is currently priced at a -6.61% to its one-year price target of $123.56. Comparatively, PLAB is -30.71% relative to its price target of $11.33. This suggests that PLAB 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 2.40 for ALB and 2.30 for PLAB, which implies that analysts are more bullish on the outlook for ALB.
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. ALB has a beta of 1.62 and PLAB’s beta is 0.61. PLAB’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. ALB has a short ratio of 4.13 compared to a short interest of 7.20 for PLAB. This implies that the market is currently less bearish on the outlook for ALB.
Photronics, Inc. (NASDAQ:PLAB) beats Albemarle Corporation (NYSE:ALB) on a total of 11 of the 14 factors compared between the two stocks. PLAB is growing fastly, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, PLAB is the cheaper of the two stocks on an earnings, book value and sales basis, PLAB is more undervalued relative to its price target. Finally, KLAC has better sentiment signals based on short interest.