Earnings

A Side-by-side Analysis of Graphic Packaging Holding Company (GPK) and Owens-Illinois, Inc. (OI)

Graphic Packaging Holding Company (NYSE:GPK) shares are up more than 22.76% this year and recently increased 0.39% or $0.06 to settle at $15.32. Owens-Illinois, Inc. (NYSE:OI), on the other hand, is up 38.48% year to date as of 12/04/2017. It currently trades at $24.11 and has returned 3.88% during the past week.

Graphic Packaging Holding Company (NYSE:GPK) and Owens-Illinois, Inc. (NYSE:OI) are the two most active stocks in the Packaging & Containers 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.

Growth

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 GPK to grow earnings at a 16.12% annual rate over the next 5 years. Comparatively, OI is expected to grow at a 9.17% annual rate. All else equal, GPK’s higher growth rate would imply a greater 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., compared to an EBITDA margin of 14.99% for Owens-Illinois, Inc. (OI). GPK’s ROI is 9.40% while OI has a ROI of 4.20%. The interpretation is that GPK’s business generates a higher return on investment than OI’s.

Cash Flow 




The amount of free cash flow available to investors is ultimately what determines the value of a stock. GPK’s free cash flow (“FCF”) per share for the trailing twelve months was +0.21. Comparatively, OI’s free cash flow per share was +0.53. On a percent-of-sales basis, GPK’s free cash flow was 1.51% while OI converted 1.29% of its revenues into cash flow. This means that, for a given level of sales, GPK 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. GPK has a current ratio of 1.50 compared to 1.20 for OI. This means that GPK can more easily cover its most immediate liabilities over the next twelve months. GPK’s debt-to-equity ratio is 2.01 versus a D/E of 6.84 for OI. OI is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

GPK trades at a forward P/E of 18.26, a P/B of 4.20, and a P/S of 1.09, compared to a forward P/E of 8.54, a P/B of 4.77, and a P/S of 0.58 for OI. GPK 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

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. GPK is currently priced at a -8.97% to its one-year price target of 16.83. Comparatively, OI is -9.94% relative to its price target of 26.77. This suggests that OI 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 GPK and 2.70 for OI, which implies that analysts are more bullish on the outlook for OI.

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. GPK has a beta of 1.21 and OI’s beta is 1.52. GPK’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.GPK has a short ratio of 1.70 compared to a short interest of 4.32 for OI. This implies that the market is currently less bearish on the outlook for GPK.

Summary

Graphic Packaging Holding Company (NYSE:GPK) beats Owens-Illinois, Inc. (NYSE:OI) on a total of 9 of the 14 factors compared between the two stocks. GPK is growing fastly, generates a higher return on investment, has a higher cash conversion rate, higher liquidity and has lower financial risk. Finally, GPK has better sentiment signals based on short interest.

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