General Electric Company (NYSE:GE) shares are down more than -43.80% this year and recently decreased -0.84% or -$0.15 to settle at $17.61. Rexnord Corporation (NYSE:RXN), on the other hand, is up 27.26% year to date as of 12/05/2017. It currently trades at $24.66 and has returned 2.68% during the past week.
General Electric Company (NYSE:GE) and Rexnord Corporation (NYSE:RXN) are the two most active stocks in the Diversified Machinery 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.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect GE to grow earnings at a 13.00% annual rate over the next 5 years. Comparatively, RXN is expected to grow at a 11.43% annual rate. All else equal, GE’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 11.14% for Rexnord Corporation (RXN). GE’s ROI is 5.10% while RXN has a ROI of 6.20%. The interpretation is that RXN’s business generates a higher return on investment than GE’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. GE’s free cash flow (“FCF”) per share for the trailing twelve months was -0.30. Comparatively, RXN’s free cash flow per share was +0.08. On a percent-of-sales basis, GE’s free cash flow was -2.1% while RXN converted 0.43% of its revenues into cash flow. This means that, for a given level of sales, RXN is able to generate more free cash flow for investors.
Liquidity and Financial Risk
GE’s debt-to-equity ratio is 1.79 versus a D/E of 1.39 for RXN. GE is therefore the more solvent of the two companies, and has lower financial risk.
GE trades at a forward P/E of 17.38, a P/B of 2.02, and a P/S of 1.26, compared to a forward P/E of 16.20, a P/B of 2.22, and a P/S of 1.32 for RXN. 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. GE is currently priced at a -22.22% to its one-year price target of 22.64. Comparatively, RXN is -9.77% relative to its price target of 27.33. This suggests that GE 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 2.40 for GE and 2.20 for RXN, which implies that analysts are more bullish on the outlook for GE.
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. GE has a beta of 1.10 and RXN’s beta is 1.66. GE’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. GE has a short ratio of 1.66 compared to a short interest of 3.14 for RXN. This implies that the market is currently less bearish on the outlook for GE.
Rexnord Corporation (NYSE:RXN) beats General Electric Company (NYSE:GE) on a total of 7 of the 14 factors compared between the two stocks. RXN is growing fastly, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk.