Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) shares are up more than 39.59% this year and recently increased 2.08% or $0.21 to settle at $10.33. Nxt-ID, Inc. (NASDAQ:NXTD), on the other hand, is down -60.00% year to date as of 11/20/2017. It currently trades at $1.10 and has returned -22.54% during the past week.
Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) and Nxt-ID, Inc. (NASDAQ:NXTD) are the two most active stocks in the Security & Protection Services industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
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 KTOS to grow earnings at a 13.00% annual rate over the next 5 years.
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. EBITDA margin of 14.66% for Nxt-ID, Inc. (NXTD). KTOS’s ROI is -3.70% while NXTD has a ROI of 1025.60%. The interpretation is that NXTD’s business generates a higher return on investment than KTOS’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. KTOS’s free cash flow (“FCF”) per share for the trailing twelve months was -0.13. Comparatively, NXTD’s free cash flow per share was -0.09. On a percent-of-sales basis, KTOS’s free cash flow was -0% while NXTD converted -0.02% of its revenues into cash flow. This means that, for a given level of sales, KTOS 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. KTOS has a current ratio of 2.90 compared to 0.60 for NXTD. This means that KTOS can more easily cover its most immediate liabilities over the next twelve months. KTOS’s debt-to-equity ratio is 0.00 versus a D/E of 0.47 for NXTD. NXTD is therefore the more solvent of the two companies, and has lower financial risk.
KTOS trades at a forward P/E of 32.08, a P/B of 1.76, and a P/S of 1.53, compared to a P/B of 2.44, and a P/S of 0.96 for NXTD. KTOS is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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”. KTOS is currently priced at a -27.71% to its one-year price target of 14.29. Comparatively, NXTD is -78% relative to its price target of 5.00. This suggests that NXTD 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 KTOS and 2.00 for NXTD, which implies that analysts are more bullish on the outlook for KTOS.
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. KTOS has a beta of 1.87 and NXTD’s beta is -4.18. NXTD’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. KTOS has a short ratio of 3.42 compared to a short interest of 2.42 for NXTD. This implies that the market is currently less bearish on the outlook for NXTD.
Nxt-ID, Inc. (NASDAQ:NXTD) beats Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) on a total of 9 of the 14 factors compared between the two stocks. NXTD is growing fastly, generates a higher return on investment and has higher cash flow per share. In terms of valuation, NXTD is the cheaper of the two stocks on an earnings and sales basis, NXTD is more undervalued relative to its price target. Finally, NXTD has better sentiment signals based on short interest.