Cree, Inc. (NASDAQ:CREE) and Seaspan Corporation (NYSE:SSW) are the two most active stocks in the Semiconductor Equipment & Materials 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect CREE to grow earnings at a 35.90% annual rate over the next 5 years. Comparatively, SSW is expected to grow at a 6.40% annual rate. All else equal, CREE’s higher growth rate would imply a greater potential for capital appreciation.
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 and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. Cree, Inc. (CREE) has an EBITDA margin of 9.9%, compared to an EBITDA margin of 36.19% for Seaspan Corporation (SSW). This suggests that SSW underlying business is more profitable. CREE’s ROI is -4.70% while SSW has a ROI of 0.10%. The interpretation is that SSW’s business generates a higher return on investment than CREE’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. On a percent-of-sales basis, CREE’s free cash flow was 0% while SSW converted -0.01% of its revenues into cash flow. This means that, for a given level of sales, CREE is able to generate more free cash flow for investors.
CREE trades at a forward P/E of 35.00, a P/B of 1.06, and a P/S of 1.59, compared to a forward P/E of 6.58, a P/B of 0.45, and a P/S of 1.02 for SSW. CREE 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. CREE is currently priced at a 5.11% to its one-year price target of $22.91. Comparatively, SSW is -12.64% relative to its price target of $8.23. This suggests that SSW 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 3.10 for CREE and 3.20 for SSW, which implies that analysts are more bullish on the outlook for SSW.
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. CREE has a beta of 1.01 and SSW’s beta is 0.61. SSW’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. CREE has a short ratio of 10.07 compared to a short interest of 4.65 for SSW. This implies that the market is currently less bearish on the outlook for SSW.
Seaspan Corporation (NYSE:SSW) beats Cree, Inc. (NASDAQ:CREE) on a total of 8 of the 11 factors compared between the two stocks. SSW is growing fastly and generates a higher return on investment. In terms of valuation, SSW is the cheaper of the two stocks on an earnings, book value and sales basis, SSW is more undervalued relative to its price target. Finally, SSW has better sentiment signals based on short interest.