Lamb Weston Holdings, Inc. (NYSE:LW) and Post Holdings, Inc. (NYSE:POST) are the two most active stocks in the Food – Major Diversified 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 LW to grow earnings at a 4.70% annual rate over the next 5 years. Comparatively, POST is expected to grow at a 17.10% annual rate. All else equal, POST’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. Lamb Weston Holdings, Inc. EBITDA margin of 11.98% for Post Holdings, Inc. (POST). This suggests that POST underlying business is more profitable. LW’s ROI is 19.60% while POST has a ROI of 6.40%. The interpretation is that LW’s business generates a higher return on investment than POST’s.
The value of a stock is simply the present value of its future free cash flows. LW’s free cash flow (“FCF”) per share for the trailing twelve months was +0.75. Comparatively, POST’s free cash flow per share was +2.52. On a percent-of-sales basis, LW’s free cash flow was 3.46% while POST converted 3.32% of its revenues into cash flow. This means that, for a given level of sales, LW is able to generate more free cash flow for investors.
LW trades at a forward P/E of 18.27 and a P/S of 2.13, compared to a forward P/E of 22.19, a P/B of 2.11, and a P/S of 1.12 for POST. LW is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S ratio. 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. LW is currently priced at a -7.33% to its one-year price target of $49.94. Comparatively, POST is -13.2% relative to its price target of $98.89. This suggests that POST 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 2.00 for LW and 1.80 for POST, which implies that analysts are more bullish on the outlook for LW.
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. LW has a short ratio of 1.65 compared to a short interest of 6.50 for POST. This implies that the market is currently less bearish on the outlook for LW.
Post Holdings, Inc. (NYSE:POST) beats Lamb Weston Holdings, Inc. (NYSE:LW) on a total of 7 of the 11 factors compared between the two stocks. POST generates a higher return on investment, is more profitable, has higher cash flow per share and higher liquidity. POST is more undervalued relative to its price target.Finally, KHC has better sentiment signals based on short interest.