Cinemark Holdings, Inc. (NYSE:CNK) shares are down more than -9.02% this year and recently increased 1.93% or $0.66 to settle at $34.90. Eros International Plc (NYSE:EROS), on the other hand, is down -1.15% year to date as of 11/27/2017. It currently trades at $12.90 and has returned -0.77% during the past week.
Cinemark Holdings, Inc. (NYSE:CNK) and Eros International Plc (NYSE:EROS) are the two most active stocks in the Movie Production, Theaters industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
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 CNK to grow earnings at a 15.00% annual rate over the next 5 years. Comparatively, EROS is expected to grow at a 15.00% annual rate. All else equal, All else equal, the two stocks’ identical expected growth rates would imply a similar 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. Cinemark Holdings, Inc. (CNK) has an EBITDA margin of 23.23%. This suggests that CNK underlying business is more profitable CNK’s ROI is 9.20% while EROS has a ROI of 1.30%. The interpretation is that CNK’s business generates a higher return on investment than EROS’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. CNK’s free cash flow (“FCF”) per share for the trailing twelve months was -0.33. Comparatively, EROS’s free cash flow per share was +0.47. On a percent-of-sales basis, CNK’s free cash flow was -1.32% while EROS converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, EROS is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. CNK has a current ratio of 1.50 compared to 1.30 for EROS. This means that CNK can more easily cover its most immediate liabilities over the next twelve months. CNK’s debt-to-equity ratio is 1.54 versus a D/E of 0.34 for EROS. CNK is therefore the more solvent of the two companies, and has lower financial risk.
CNK trades at a forward P/E of 15.73, a P/B of 3.02, and a P/S of 1.36, compared to a forward P/E of 21.75, a P/B of 0.96, and a P/S of 3.18 for EROS. 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”. CNK is currently priced at a -17.12% to its one-year price target of 42.11. Comparatively, EROS is -26.29% relative to its price target of 17.50. This suggests that EROS 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 2.30 for CNK and 1.30 for EROS, which implies that analysts are more bullish on the outlook for CNK.
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. CNK has a beta of 1.21 and EROS’s beta is 0.58. EROS’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. CNK has a short ratio of 8.63 compared to a short interest of 20.88 for EROS. This implies that the market is currently less bearish on the outlook for CNK.
Eros International Plc (NYSE:EROS) beats Cinemark Holdings, Inc. (NYSE:CNK) on a total of 7 of the 14 factors compared between the two stocks. EROS is more profitable, has a higher cash conversion rate and has lower financial risk. EROS is more undervalued relative to its price target. Finally, EA has better sentiment signals based on short interest.