Earnings

Comparing PayPal Holdings, Inc. (PYPL) and American Express Company (AXP)

PayPal Holdings, Inc. (NASDAQ:PYPL) shares are up more than 86.04% this year and recently decreased -1.42% or -$1.06 to settle at $73.43. American Express Company (NYSE:AXP), on the other hand, is up 25.89% year to date as of 11/15/2017. It currently trades at $93.26 and has returned -1.97% during the past week.

PayPal Holdings, Inc. (NASDAQ:PYPL) and American Express Company (NYSE:AXP) are the two most active stocks in the Credit Services industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect PYPL to grow earnings at a 21.04% annual rate over the next 5 years. Comparatively, AXP is expected to grow at a 11.00% annual rate. All else equal, PYPL’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 35.06% for American Express Company (AXP). PYPL’s ROI is 9.20% while AXP has a ROI of 4.20%. The interpretation is that PYPL’s business generates a higher return on investment than AXP’s.

Cash Flow 




The amount of free cash flow available to investors is ultimately what determines the value of a stock. PYPL’s free cash flow (“FCF”) per share for the trailing twelve months was +0.69. Comparatively, AXP’s free cash flow per share was +4.22. On a percent-of-sales basis, PYPL’s free cash flow was 7.65% while AXP converted 10.83% of its revenues into cash flow. This means that, for a given level of sales, AXP is able to generate more free cash flow for investors.

Liquidity and Financial Risk

PYPL’s debt-to-equity ratio is 0.00 versus a D/E of 5.33 for AXP. AXP is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

PYPL trades at a forward P/E of 32.31, a P/B of 5.72, and a P/S of 7.17, compared to a forward P/E of 14.42, a P/B of 3.88, and a P/S of 2.43 for AXP. PYPL 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

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. PYPL is currently priced at a -3.51% to its one-year price target of 76.10. Comparatively, AXP is -2.13% relative to its price target of 95.29. This suggests that PYPL 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 1.90 for PYPL and 2.50 for AXP, which implies that analysts are more bullish on the outlook for AXP.

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.PYPL has a short ratio of 2.54 compared to a short interest of 4.42 for AXP. This implies that the market is currently less bearish on the outlook for PYPL.

Summary

PayPal Holdings, Inc. (NASDAQ:PYPL) beats American Express Company (NYSE:AXP) on a total of 8 of the 14 factors compared between the two stocks. PYPL is growing fastly, generates a higher return on investment, higher liquidity and has lower financial risk. PYPL is more undervalued relative to its price target. Finally, PYPL has better sentiment signals based on short interest.

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