Danaher Corporation (NYSE:DHR) shares are up more than 6.22% this year and recently increased 0.36% or $0.35 to settle at $98.59. Cummins Inc. (NYSE:CMI), on the other hand, is up 4.11% year to date as of 01/11/2018. It currently trades at $183.90 and has returned 1.18% during the past week.
Danaher Corporation (NYSE:DHR) and Cummins Inc. (NYSE:CMI) are the two most active stocks in the Diversified Machinery industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
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 DHR to grow earnings at a 8.21% annual rate over the next 5 years. Comparatively, CMI is expected to grow at a 13.85% annual rate. All else equal, CMI’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 14.52% for Cummins Inc. (CMI). DHR’s ROI is 6.00% while CMI has a ROI of 16.70%. The interpretation is that CMI’s business generates a higher return on investment than DHR’s.
If there’s one thing investors care more about than earnings, it’s cash flow. DHR’s free cash flow (“FCF”) per share for the trailing twelve months was +1.18. Comparatively, CMI’s free cash flow per share was +2.19. On a percent-of-sales basis, DHR’s free cash flow was 4.86% while CMI converted 2.08% of its revenues into cash flow. This means that, for a given level of sales, DHR 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. DHR has a current ratio of 1.40 compared to 1.60 for CMI. This means that CMI can more easily cover its most immediate liabilities over the next twelve months. DHR’s debt-to-equity ratio is 0.43 versus a D/E of 0.30 for CMI. DHR is therefore the more solvent of the two companies, and has lower financial risk.
DHR trades at a forward P/E of 22.74, a P/B of 2.70, and a P/S of 3.82, compared to a forward P/E of 15.66, a P/B of 4.01, and a P/S of 1.57 for CMI. DHR 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. DHR is currently priced at a -1.6% to its one-year price target of 100.19. Comparatively, CMI is 2% relative to its price target of 180.29. This suggests that DHR 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 1.80 for DHR and 2.80 for CMI, which implies that analysts are more bullish on the outlook for CMI.
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. DHR has a beta of 1.01 and CMI’s beta is 1.13. DHR’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. DHR has a short ratio of 2.50 compared to a short interest of 3.77 for CMI. This implies that the market is currently less bearish on the outlook for DHR.
Cummins Inc. (NYSE:CMI) beats Danaher Corporation (NYSE:DHR) on a total of 7 of the 14 factors compared between the two stocks. CMI is more profitable, generates a higher return on investment, has higher cash flow per share, higher liquidity and has lower financial risk. In terms of valuation, CMI is the cheaper of the two stocks on an earnings and sales basis, Finally, DOV has better sentiment signals based on short interest.