Catalent, Inc. (NYSE:CTLT) shares are up more than 46.18% this year and recently decreased -2.47% or -$1 to settle at $39.41. Akorn, Inc. (NASDAQ:AKRX), on the other hand, is up 49.02% year to date as of 11/28/2017. It currently trades at $32.53 and has returned 0.71% during the past week.
Catalent, Inc. (NYSE:CTLT) and Akorn, Inc. (NASDAQ:AKRX) are the two most active stocks in the Drugs – Generic 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.
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 CTLT to grow earnings at a 9.25% annual rate over the next 5 years. Comparatively, AKRX is expected to grow at a -7.80% annual rate. All else equal, CTLT’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. 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 22.08% for Akorn, Inc. (AKRX). CTLT’s ROI is 7.30% while AKRX has a ROI of 14.80%. The interpretation is that AKRX’s business generates a higher return on investment than CTLT’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. CTLT’s free cash flow (“FCF”) per share for the trailing twelve months was +0.32. Comparatively, AKRX’s free cash flow per share was +0.18. On a percent-of-sales basis, CTLT’s free cash flow was 2.05% while AKRX converted 2.02% of its revenues into cash flow. This means that, for a given level of sales, CTLT 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. CTLT has a current ratio of 2.90 compared to 4.20 for AKRX. This means that AKRX can more easily cover its most immediate liabilities over the next twelve months. CTLT’s debt-to-equity ratio is 2.03 versus a D/E of 0.00 for AKRX. CTLT is therefore the more solvent of the two companies, and has lower financial risk.
CTLT trades at a forward P/E of 21.51, a P/B of 4.77, and a P/S of 2.37, compared to a forward P/E of 27.69, a P/B of 4.58, and a P/S of 4.30 for AKRX. 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”. CTLT is currently priced at a -13.52% to its one-year price target of 45.57. Comparatively, AKRX is 4.46% relative to its price target of 31.14. This suggests that CTLT 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 2.00 for CTLT and 3.00 for AKRX, which implies that analysts are more bullish on the outlook for AKRX.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. CTLT has a beta of 1.48 and AKRX’s beta is 1.34. AKRX’s shares are therefore the less volatile of the two stocks.
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.CTLT has a short ratio of 1.60 compared to a short interest of 11.28 for AKRX. This implies that the market is currently less bearish on the outlook for CTLT.
Catalent, Inc. (NYSE:CTLT) beats Akorn, Inc. (NASDAQ:AKRX) on a total of 8 of the 14 factors compared between the two stocks. CTLT is growing fastly, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, CTLT is the cheaper of the two stocks on an earnings and sales basis, CTLT is more undervalued relative to its price target. Finally, CTLT has better sentiment signals based on short interest.