Fluor Corporation (NYSE:FLR) and Dycom Industries, Inc. (NYSE:DY) are the two most active stocks in the Heavy Construction industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect FLR to grow earnings at a 10.40% annual rate over the next 5 years. Comparatively, DY is expected to grow at a 12.33% annual rate. All else equal, DY’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. Fluor Corporation (FLR) has an EBITDA margin of 2.82%, compared to an EBITDA margin of 13.84% for Dycom Industries, Inc. (DY). This suggests that DY underlying business is more profitable. FLR’s ROI is 6.90% while DY has a ROI of 12.70%. The interpretation is that DY’s business generates a higher return on investment than FLR’s.
If there’s one thing investors care more about than earnings, it’s cash flow. FLR’s free cash flow (“FCF”) per share for the trailing twelve months was +0.38. Comparatively, DY’s free cash flow per share was +2.65. On a percent-of-sales basis, FLR’s free cash flow was 0.28% while DY converted 2.69% of its revenues into cash flow. This means that, for a given level of sales, DY 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. FLR has a current ratio of 1.50 compared to 2.90 for DY. This means that DY can more easily cover its most immediate liabilities over the next twelve months. FLR’s debt-to-equity ratio is 0.50 versus a D/E of 1.13 for DY. DY is therefore the more solvent of the two companies, and has lower financial risk.
FLR trades at a forward P/E of 16.18, a P/B of 1.78, and a P/S of 0.29, compared to a forward P/E of 14.31, a P/B of 3.72, and a P/S of 0.81 for DY. 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 isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. FLR is currently priced at a -10.58% to its one-year price target of $45.28. Comparatively, DY is -17.55% relative to its price target of $97.33. This suggests that DY 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 2.60 for FLR and 1.60 for DY, which implies that analysts are more bullish on the outlook for FLR.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. FLR has a beta of 1.38 and DY’s beta is 1.28. DY’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. FLR has a short ratio of 4.03 compared to a short interest of 9.19 for DY. This implies that the market is currently less bearish on the outlook for FLR.
Dycom Industries, Inc. (NYSE:DY) beats Fluor Corporation (NYSE:FLR) on a total of 10 of the 14 factors compared between the two stocks. DY has lower financial risk, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. DY is more undervalued relative to its price target. Finally, VEEV has better sentiment signals based on short interest.