Illinois Tool Works Inc. (NYSE:ITW) and Briggs & Stratton Corporation (NYSE:BGG) are the two most active stocks in the Diversified Machinery 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.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin which control for differences in capital structure between the two companies, to measure profitability. Illinois Tool Works Inc. (ITW) has an EBITDA margin of 25.48%, compared to an EBITDA margin of 7.43% for Briggs & Stratton Corporation (BGG). This suggests that ITW underlying business is more profitable.
Cash is king when it comes to investing. ITW’s free cash flow (“FCF”) per share for the trailing twelve months was +0.47. Comparatively, BGG’s free cash flow per share was +1.71. On a percent-of-sales basis, ITW’s free cash flow was 1.19% while BGG converted 4.1% of its revenues into cash flow. This means that, for a given level of sales, BGG is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. ITW has a current ratio of 2.30 compared to 2.10 for BGG. This means that ITW can more easily cover its most immediate liabilities over the next twelve months. ITW’s debt-to-equity ratio is 1.69 versus a D/E of 0.00 for BGG. ITW is therefore the more solvent of the two companies, and has lower financial risk.
ITW trades at a forward P/E of 19.17, a P/B of 9.82, and a P/S of 3.36, compared to a forward P/E of 12.04, a P/B of 1.51, and a P/S of 0.49 for BGG. ITW 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
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. ITW is currently priced at a -10.57% to its one-year price target of $151.93. Comparatively, BGG is -19.44% relative to its price target of $25.00. This suggests that BGG 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 ITW and 2.00 for BGG, which implies that analysts are more bullish on the outlook for ITW.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. ITW has a beta of 1.12 and BGG’s beta is 0.76. BGG’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. ITW has a short ratio of 5.19 compared to a short interest of 10.16 for BGG. This implies that the market is currently less bearish on the outlook for ITW.
Briggs & Stratton Corporation (NYSE:BGG) beats Illinois Tool Works Inc. (NYSE:ITW) on a total of 9 of the 12 factors compared between the two stocks. BGG is more profitable, has a higher cash conversion rate and has lower financial risk. In terms of valuation, BGG is the cheaper of the two stocks on an earnings, book value and sales basis, BGG is more undervalued relative to its price target. Finally, DFS has better sentiment signals based on short interest.