Earnings

A Side-by-side Analysis of Colfax Corporation (CFX) and Welbilt, Inc. (WBT)

Colfax Corporation (NYSE:CFX) shares are down more than -2.92% this year and recently decreased -1.19% or -$0.42 to settle at $34.88. Welbilt, Inc. (NYSE:WBT), on the other hand, is up 10.19% year to date as of 11/15/2017. It currently trades at $21.30 and has returned 1.33% during the past week.

Colfax Corporation (NYSE:CFX) and Welbilt, Inc. (NYSE:WBT) are the two most active stocks in the Diversified Machinery 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.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect CFX to grow earnings at a 12.04% annual rate over the next 5 years. Comparatively, WBT is expected to grow at a 5.00% annual rate. All else equal, CFX’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 17.36% for Welbilt, Inc. (WBT). CFX’s ROI is 4.20% while WBT has a ROI of 14.10%. The interpretation is that WBT’s business generates a higher return on investment than CFX’s.

Cash Flow 




Cash is king when it comes to investing. CFX’s free cash flow (“FCF”) per share for the trailing twelve months was +0.05. Comparatively, WBT’s free cash flow per share was +0.42. On a percent-of-sales basis, CFX’s free cash flow was 0.17% while WBT converted 4.02% of its revenues into cash flow. This means that, for a given level of sales, WBT is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. CFX has a current ratio of 1.80 compared to 1.30 for WBT. This means that CFX can more easily cover its most immediate liabilities over the next twelve months. CFX’s debt-to-equity ratio is 0.41 versus a D/E of 118.01 for WBT. WBT is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

CFX trades at a forward P/E of 18.69, a P/B of 1.30, and a P/S of 1.27, compared to a forward P/E of 22.90, a P/B of 266.25, and a P/S of 2.03 for WBT. CFX 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

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. CFX is currently priced at a -20.56% to its one-year price target of 43.91. Comparatively, WBT is -14.11% relative to its price target of 24.80. This suggests that CFX 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 CFX and 2.30 for WBT, which implies that analysts are more bullish on the outlook for CFX.

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. CFX has a short ratio of 1.09 compared to a short interest of 12.23 for WBT. This implies that the market is currently less bearish on the outlook for CFX.

Summary

Colfax Corporation (NYSE:CFX) beats Welbilt, Inc. (NYSE:WBT) on a total of 8 of the 14 factors compared between the two stocks. CFX is growing fastly, higher liquidity and has lower financial risk. In terms of valuation, CFX is the cheaper of the two stocks on an earnings, book value and sales basis, CFX is more undervalued relative to its price target. Finally, CFX has better sentiment signals based on short interest.

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