Earnings

Dissecting the Numbers for Black Knight, Inc. (BKI) and KapStone Paper and Packaging Corporation (KS)

Black Knight, Inc. (NYSE:BKI) shares are up more than 10.08% this year and recently decreased -0.31% or -$0.15 to settle at $48.60. KapStone Paper and Packaging Corporation (NYSE:KS), on the other hand, is up 10.62% year to date as of 01/09/2018. It currently trades at $25.10 and has returned 7.49% during the past week.

Black Knight, Inc. (NYSE:BKI) and KapStone Paper and Packaging Corporation (NYSE:KS) are the two most active stocks in the Paper & Paper Products industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

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 BKI to grow earnings at a 18.73% annual rate over the next 5 years. Comparatively, KS is expected to grow at a 19.05% annual rate. All else equal, KS’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. EBITDA margin of 10.38% for KapStone Paper and Packaging Corporation (KS). BKI’s ROI is 7.20% while KS has a ROI of 5.40%. The interpretation is that BKI’s business generates a higher return on investment than KS’s.

Cash Flow 




Cash is king when it comes to investing. BKI’s free cash flow (“FCF”) per share for the trailing twelve months was +1.14. Comparatively, KS’s free cash flow per share was +0.84. On a percent-of-sales basis, BKI’s free cash flow was 17.04% while KS converted 2.65% of its revenues into cash flow. This means that, for a given level of sales, BKI is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. BKI has a current ratio of 1.90 compared to 2.10 for KS. This means that KS can more easily cover its most immediate liabilities over the next twelve months. BKI’s debt-to-equity ratio is 0.93 versus a D/E of 1.65 for KS. KS is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

BKI trades at a forward P/E of 28.57, a P/B of 4.52, and a P/S of 7.16, compared to a forward P/E of 15.70, a P/B of 2.57, and a P/S of 0.75 for KS. BKI 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

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. BKI is currently priced at a -4.27% to its one-year price target of 50.77. Comparatively, KS is -2.45% relative to its price target of 25.73. This suggests that BKI 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 1.60 for BKI and 2.00 for KS, which implies that analysts are more bullish on the outlook for KS.

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. BKI has a short ratio of 1.89 compared to a short interest of 3.23 for KS. This implies that the market is currently less bearish on the outlook for BKI.

Summary

Black Knight, Inc. (NYSE:BKI) beats KapStone Paper and Packaging Corporation (NYSE:KS) on a total of 8 of the 14 factors compared between the two stocks. BKI generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. BKI is more undervalued relative to its price target. Finally, BKI has better sentiment signals based on short interest.

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