United Technologies Corporation (NYSE:UTX) shares are up more than 8.30% this year and recently decreased -0.08% or -$0.1 to settle at $118.72. The Boeing Company (NYSE:BA), on the other hand, is up 67.48% year to date as of 10/13/2017. It currently trades at $260.74 and has returned 0.84% during the past week.
United Technologies Corporation (NYSE:UTX) and The Boeing Company (NYSE:BA) are the two most active stocks in the Aerospace/Defense Products & 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 consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect UTX to grow earnings at a 5.62% annual rate over the next 5 years. Comparatively, BA is expected to grow at a 18.69% annual rate. All else equal, BA’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 9.52% for The Boeing Company (BA). UTX’s ROI is 12.60% while BA has a ROI of 47.90%. The interpretation is that BA’s business generates a higher return on investment than UTX’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. UTX’s free cash flow (“FCF”) per share for the trailing twelve months was +1.50. Comparatively, BA’s free cash flow per share was +6.01. On a percent-of-sales basis, UTX’s free cash flow was 2.09% while BA converted 3.76% of its revenues into cash flow. This means that, for a given level of sales, BA 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. UTX has a current ratio of 1.40 compared to 1.20 for BA. This means that UTX can more easily cover its most immediate liabilities over the next twelve months.
UTX trades at a forward P/E of 17.32, a P/B of 3.29, and a P/S of 1.63, compared to a forward P/E of 24.08, and a P/S of 1.70 for BA. 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. UTX is currently priced at a -5.82% to its one-year price target of 126.06. Comparatively, BA is -5.36% relative to its price target of 275.50. This suggests that UTX 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 2.50 for UTX and 2.10 for BA, which implies that analysts are more bullish on the outlook for UTX.
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. UTX has a beta of 1.06 and BA’s beta is 1.22. UTX’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.UTX has a short ratio of 3.09 compared to a short interest of 2.08 for BA. This implies that the market is currently less bearish on the outlook for BA.
The Boeing Company (NYSE:BA) beats United Technologies Corporation (NYSE:UTX) on a total of 8 of the 14 factors compared between the two stocks. BA is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. Finally, BA has better sentiment signals based on short interest.