Henry Schein, Inc. (NASDAQ:HSIC) shares are down more than -6.90% this year and recently decreased -0.55% or -$0.39 to settle at $70.62. Owens & Minor, Inc. (NYSE:OMI), on the other hand, is down -46.56% year to date as of 12/26/2017. It currently trades at $18.86 and has returned 0.59% during the past week.
Henry Schein, Inc. (NASDAQ:HSIC) and Owens & Minor, Inc. (NYSE:OMI) are the two most active stocks in the Medical Equipment Wholesale 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.
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 HSIC to grow earnings at a 8.72% annual rate over the next 5 years. Comparatively, OMI is expected to grow at a 3.67% annual rate. All else equal, HSIC’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 2.17% for Owens & Minor, Inc. (OMI). HSIC’s ROI is 13.80% while OMI has a ROI of 8.90%. The interpretation is that HSIC’s business generates a higher return on investment than OMI’s.
Cash is king when it comes to investing. HSIC’s free cash flow (“FCF”) per share for the trailing twelve months was +0.71. Comparatively, OMI’s free cash flow per share was +1.07. On a percent-of-sales basis, HSIC’s free cash flow was 0.96% while OMI converted 0.67% of its revenues into cash flow. This means that, for a given level of sales, HSIC is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. HSIC has a current ratio of 1.60 compared to 1.80 for OMI. This means that OMI can more easily cover its most immediate liabilities over the next twelve months. HSIC’s debt-to-equity ratio is 0.52 versus a D/E of 0.91 for OMI. OMI is therefore the more solvent of the two companies, and has lower financial risk.
HSIC trades at a forward P/E of 18.10, a P/B of 3.68, and a P/S of 0.91, compared to a forward P/E of 9.07, a P/B of 1.12, and a P/S of 0.13 for OMI. HSIC is the expensive 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. HSIC is currently priced at a -12.85% to its one-year price target of 81.03. Comparatively, OMI is -8.36% relative to its price target of 20.58. This suggests that HSIC 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 HSIC and 3.50 for OMI, which implies that analysts are more bullish on the outlook for OMI.
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. HSIC has a beta of 0.99 and OMI’s beta is 0.90. OMI’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.HSIC has a short ratio of 5.08 compared to a short interest of 5.64 for OMI. This implies that the market is currently less bearish on the outlook for HSIC.
Henry Schein, Inc. (NASDAQ:HSIC) beats Owens & Minor, Inc. (NYSE:OMI) on a total of 8 of the 14 factors compared between the two stocks. HSIC is growing fastly, is more profitable, generates a higher return on investment, has a higher cash conversion rate and has lower financial risk. HSIC is more undervalued relative to its price target. Finally, HSIC has better sentiment signals based on short interest.