The Goodyear Tire & Rubber Company (NASDAQ:GT) shares are down more than -0.16% this year and recently increased 0.55% or $0.17 to settle at $30.82. Advanced Drainage Systems, Inc. (NYSE:WMS), on the other hand, is up 13.35% year to date as of 11/21/2017. It currently trades at $23.35 and has returned 9.62% during the past week.
The Goodyear Tire & Rubber Company (NASDAQ:GT) and Advanced Drainage Systems, Inc. (NYSE:WMS) are the two most active stocks in the Rubber & Plastics 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.
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 GT to grow earnings at a 6.49% annual rate over the next 5 years. Comparatively, WMS is expected to grow at a 16.05% annual rate. All else equal, WMS’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 14.6% for Advanced Drainage Systems, Inc. (WMS). GT’s ROI is 16.00% while WMS has a ROI of 11.40%. The interpretation is that GT’s business generates a higher return on investment than WMS’s.
The value of a stock is simply the present value of its future free cash flows. GT’s free cash flow (“FCF”) per share for the trailing twelve months was -0.71. Comparatively, WMS’s free cash flow per share was +0.56. On a percent-of-sales basis, GT’s free cash flow was -1.15% while WMS converted 2.49% of its revenues into cash flow. This means that, for a given level of sales, WMS is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. GT has a current ratio of 1.40 compared to 2.30 for WMS. This means that WMS can more easily cover its most immediate liabilities over the next twelve months. GT’s debt-to-equity ratio is 1.31 versus a D/E of 6.01 for WMS. WMS is therefore the more solvent of the two companies, and has lower financial risk.
GT trades at a forward P/E of 8.31, a P/B of 1.58, and a P/S of 0.51, compared to a forward P/E of 24.32, a P/B of 16.56, and a P/S of 0.99 for WMS. GT 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. GT is currently priced at a -14.65% to its one-year price target of 36.11. Comparatively, WMS is -3.87% relative to its price target of 24.29. This suggests that GT 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 GT and 3.30 for WMS, which implies that analysts are more bullish on the outlook for WMS.
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. GT has a beta of 1.52 and WMS’s beta is 0.92. WMS’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. GT has a short ratio of 7.74 compared to a short interest of 10.94 for WMS. This implies that the market is currently less bearish on the outlook for GT.
The Goodyear Tire & Rubber Company (NASDAQ:GT) beats Advanced Drainage Systems, Inc. (NYSE:WMS) on a total of 8 of the 14 factors compared between the two stocks. GT generates a higher return on investment and has lower financial risk. In terms of valuation, GT is the cheaper of the two stocks on an earnings, book value and sales basis, GT is more undervalued relative to its price target. Finally, GT has better sentiment signals based on short interest.