Cerner Corporation (NASDAQ:CERN) shares are up more than 7.79% this year and recently increased 0.40% or $0.29 to settle at $72.64. Teladoc, Inc. (NYSE:TDOC), on the other hand, is down -4.73% year to date as of 01/10/2018. It currently trades at $33.20 and has returned -10.75% during the past week.
Cerner Corporation (NASDAQ:CERN) and Teladoc, Inc. (NYSE:TDOC) are the two most active stocks in the Healthcare Information Services 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect CERN to grow earnings at a 16.53% annual rate over the next 5 years.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. Cerner Corporation (CERN) has an EBITDA margin of 29.87%. This suggests that CERN underlying business is more profitable CERN’s ROI is 14.00% while TDOC has a ROI of -26.00%. The interpretation is that CERN’s business generates a higher return on investment than TDOC’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. CERN’s free cash flow (“FCF”) per share for the trailing twelve months was +0.86. Comparatively, TDOC’s free cash flow per share was -0.22. On a percent-of-sales basis, CERN’s free cash flow was 5.96% while TDOC converted -0.01% of its revenues into cash flow. This means that, for a given level of sales, CERN 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. CERN has a current ratio of 2.80 compared to 5.10 for TDOC. This means that TDOC can more easily cover its most immediate liabilities over the next twelve months. CERN’s debt-to-equity ratio is 0.12 versus a D/E of 0.83 for TDOC. TDOC is therefore the more solvent of the two companies, and has lower financial risk.
CERN trades at a forward P/E of 27.62, a P/B of 5.28, and a P/S of 4.65, compared to a P/B of 4.20, and a P/S of 10.30 for TDOC. CERN is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B 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. CERN is currently priced at a 1.89% to its one-year price target of 71.29. Comparatively, TDOC is -16.52% relative to its price target of 39.77. This suggests that TDOC 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 2.20 for CERN and 1.90 for TDOC, which implies that analysts are more bullish on the outlook for CERN.
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.CERN has a short ratio of 5.47 compared to a short interest of 18.15 for TDOC. This implies that the market is currently less bearish on the outlook for CERN.
Cerner Corporation (NASDAQ:CERN) beats Teladoc, Inc. (NYSE:TDOC) on a total of 8 of the 14 factors compared between the two stocks. CERN is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. Finally, CERN has better sentiment signals based on short interest.