TD Ameritrade Holding Corporation (NASDAQ:AMTD) shares are up more than 14.68% this year and recently increased 3.86% or $1.86 to settle at $50.00. Leucadia National Corporation (NYSE:LUK), on the other hand, is up 10.71% year to date as of 10/24/2017. It currently trades at $25.74 and has returned 0.35% during the past week.
TD Ameritrade Holding Corporation (NASDAQ:AMTD) and Leucadia National Corporation (NYSE:LUK) are the two most active stocks in the Investment Brokerage – National industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect AMTD to grow earnings at a 18.18% annual rate over the next 5 years. Comparatively, LUK is expected to grow at a 18.00% annual rate. All else equal, AMTD’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., compared to an EBITDA margin of 9.68% for Leucadia National Corporation (LUK). AMTD’s ROI is 13.00% while LUK has a ROI of 0.50%. The interpretation is that AMTD’s business generates a higher return on investment than LUK’s.
If there’s one thing investors care more about than earnings, it’s cash flow. AMTD’s free cash flow (“FCF”) per share for the trailing twelve months was -2.79. Comparatively, LUK’s free cash flow per share was -2.29. On a percent-of-sales basis, AMTD’s free cash flow was -44.29% while LUK converted -8.16% of its revenues into cash flow. This means that, for a given level of sales, LUK is able to generate more free cash flow for investors.
AMTD trades at a forward P/E of 24.61, a P/B of 4.84, and a P/S of 7.36, compared to a forward P/E of 16.93, a P/B of 0.88, and a P/S of 0.83 for LUK. AMTD 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
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”. AMTD is currently priced at a -1.96% to its one-year price target of 51.00. Comparatively, LUK is -14.2% relative to its price target of 30.00. This suggests that LUK 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 AMTD and 1.00 for LUK, which implies that analysts are more bullish on the outlook for AMTD.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. AMTD has a beta of 1.55 and LUK’s beta is 1.30. LUK’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. AMTD has a short ratio of 5.21 compared to a short interest of 2.42 for LUK. This implies that the market is currently less bearish on the outlook for LUK.
Leucadia National Corporation (NYSE:LUK) beats TD Ameritrade Holding Corporation (NASDAQ:AMTD) on a total of 10 of the 14 factors compared between the two stocks. LUK is growing fastly, has a higher cash conversion rate and has lower financial risk. In terms of valuation, LUK is the cheaper of the two stocks on an earnings, book value and sales basis, LUK is more undervalued relative to its price target. Finally, LUK has better sentiment signals based on short interest.