Allergan plc (NYSE:AGN) shares are down more than -5.52% this year and recently decreased -3.46% or -$7.11 to settle at $198.41. Zoetis Inc. (NYSE:ZTS), on the other hand, is up 22.75% year to date as of 10/16/2017. It currently trades at $65.71 and has returned 3.11% during the past week.
Allergan plc (NYSE:AGN) and Zoetis Inc. (NYSE:ZTS) are the two most active stocks in the Drugs – Generic 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect AGN to grow earnings at a 12.49% annual rate over the next 5 years. Comparatively, ZTS is expected to grow at a 13.48% annual rate. All else equal, ZTS’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 32.96% for Zoetis Inc. (ZTS). AGN’s ROI is 0.10% while ZTS has a ROI of 13.80%. The interpretation is that ZTS’s business generates a higher return on investment than AGN’s.
The value of a stock is simply the present value of its future free cash flows. AGN’s free cash flow (“FCF”) per share for the trailing twelve months was +3.64. Comparatively, ZTS’s free cash flow per share was +0.16. On a percent-of-sales basis, AGN’s free cash flow was 8.35% while ZTS converted 1.6% of its revenues into cash flow. This means that, for a given level of sales, AGN is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. AGN has a current ratio of 1.20 compared to 2.00 for ZTS. This means that ZTS can more easily cover its most immediate liabilities over the next twelve months. AGN’s debt-to-equity ratio is 0.43 versus a D/E of 2.66 for ZTS. ZTS is therefore the more solvent of the two companies, and has lower financial risk.
AGN trades at a forward P/E of 11.29, a P/B of 0.95, and a P/S of 4.41, compared to a forward P/E of 24.54, a P/B of 18.83, and a P/S of 6.43 for ZTS. AGN 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. AGN is currently priced at a -25.57% to its one-year price target of 266.56. Comparatively, ZTS is -2.52% relative to its price target of 67.41. This suggests that AGN 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 2.10 for AGN and 2.00 for ZTS, which implies that analysts are more bullish on the outlook for AGN.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. AGN has a beta of 1.16 and ZTS’s beta is 1.03. ZTS’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. AGN has a short ratio of 2.95 compared to a short interest of 4.16 for ZTS. This implies that the market is currently less bearish on the outlook for AGN.
Allergan plc (NYSE:AGN) beats Zoetis Inc. (NYSE:ZTS) on a total of 8 of the 14 factors compared between the two stocks. AGN has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, AGN is the cheaper of the two stocks on an earnings, book value and sales basis, AGN is more undervalued relative to its price target. Finally, AGN has better sentiment signals based on short interest.