Knight Transportation, Inc. (NYSE:KNX) and Werner Enterprises, Inc. (NASDAQ:WERN) are the two most active stocks in the Trucking 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 consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect KNX to grow earnings at a 9.66% annual rate over the next 5 years. Comparatively, WERN is expected to grow at a 12.85% annual rate. All else equal, WERN’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. Knight Transportation, Inc. (KNX) has an EBITDA margin of 24.31%, compared to an EBITDA margin of 17% for Werner Enterprises, Inc. (WERN). This suggests that KNX underlying business is more profitable. KNX’s ROI is 11.30% while WERN has a ROI of 6.60%. The interpretation is that KNX’s business generates a higher return on investment than WERN’s.
The value of a stock is simply the present value of its future free cash flows. KNX’s free cash flow (“FCF”) per share for the trailing twelve months was +0.35. Comparatively, WERN’s free cash flow per share was +0.14. On a percent-of-sales basis, KNX’s free cash flow was 2.53% while WERN converted 0.5% of its revenues into cash flow. This means that, for a given level of sales, KNX is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. KNX has a current ratio of 3.20 compared to 1.70 for WERN. This means that KNX can more easily cover its most immediate liabilities over the next twelve months. KNX’s debt-to-equity ratio is 0.00 versus a D/E of 0.07 for WERN. WERN is therefore the more solvent of the two companies, and has lower financial risk.
KNX trades at a forward P/E of 32.76, a P/B of 4.03, and a P/S of 2.95, compared to a forward P/E of 23.69, a P/B of 2.43, and a P/S of 1.20 for WERN. KNX 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. KNX is currently priced at a 4.29% to its one-year price target of $39.17. Comparatively, WERN is 11.34% relative to its price target of $31.21. This suggests that KNX 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 KNX and 2.70 for WERN, which implies that analysts are more bullish on the outlook for WERN.
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. KNX has a beta of 0.87 and WERN’s beta is 0.87. WERN’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. KNX has a short ratio of 8.55 compared to a short interest of 5.72 for WERN. This implies that the market is currently less bearish on the outlook for WERN.
Knight Transportation, Inc. (NYSE:KNX) beats Werner Enterprises, Inc. (NASDAQ:WERN) on a total of 8 of the 14 factors compared between the two stocks. KNX is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. KNX is more undervalued relative to its price target. Finally, GOOS has better sentiment signals based on short interest.