Cerner Corporation (NASDAQ:CERN) and Veeva Systems Inc. (NYSE:VEEV) are the two most active stocks in the Healthcare Information Services 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.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect CERN to grow earnings at a 15.14% annual rate over the next 5 years. Comparatively, VEEV is expected to grow at a 21.85% annual rate. All else equal, VEEV’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. Cerner Corporation (CERN) has an EBITDA margin of 29.86%, compared to an EBITDA margin of 24.19% for Veeva Systems Inc. (VEEV). This suggests that CERN underlying business is more profitable. CERN’s ROI is 14.00% while VEEV has a ROI of 10.30%. The interpretation is that CERN’s business generates a higher return on investment than VEEV’s.
The value of a stock is simply the present value of its future free cash flows. CERN’s free cash flow (“FCF”) per share for the trailing twelve months was +0.57. Comparatively, VEEV’s free cash flow per share was +0.36. On a percent-of-sales basis, CERN’s free cash flow was 3.94% while VEEV converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, CERN 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. CERN has a current ratio of 2.40 compared to 3.30 for VEEV. This means that VEEV can more easily cover its most immediate liabilities over the next twelve months. CERN’s debt-to-equity ratio is 0.12 versus a D/E of 0.00 for VEEV. CERN is therefore the more solvent of the two companies, and has lower financial risk.
CERN trades at a forward P/E of 24.59, a P/B of 5.19, and a P/S of 4.42, compared to a forward P/E of 59.01, a P/B of 10.90, and a P/S of 13.07 for VEEV. CERN is the cheaper 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. CERN is currently priced at a -1.54% to its one-year price target of $69.35. Comparatively, VEEV is -9.76% relative to its price target of $66.18. This suggests that VEEV 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 2.30 for CERN and 2.10 for VEEV, which implies that analysts are more bullish on the outlook for CERN.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. CERN has a beta of 0.96 and VEEV’s beta is 1.65. CERN’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. CERN has a short ratio of 9.45 compared to a short interest of 3.63 for VEEV. This implies that the market is currently less bearish on the outlook for VEEV.
Cerner Corporation (NASDAQ:CERN) beats Veeva Systems Inc. (NYSE:VEEV) on a total of 8 of the 14 factors compared between the two stocks. CERN is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, CERN is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, ANTM has better sentiment signals based on short interest.