Earnings

Dissecting the Numbers for Mylan N.V. (MYL) and Catalent, Inc. (CTLT)

Mylan N.V. (NASDAQ:MYL) shares are up more than 10.40% this year and recently increased 5.23% or $2.32 to settle at $46.71. Catalent, Inc. (NYSE:CTLT), on the other hand, is up 3.21% year to date as of 01/10/2018. It currently trades at $42.40 and has returned 1.48% during the past week.

Mylan N.V. (NASDAQ:MYL) and Catalent, Inc. (NYSE:CTLT) are the two most active stocks in the Drugs – Generic 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

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect MYL to grow earnings at a 4.02% annual rate over the next 5 years. Comparatively, CTLT is expected to grow at a 9.25% annual rate. All else equal, CTLT’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 17.21% for Catalent, Inc. (CTLT). MYL’s ROI is 3.20% while CTLT has a ROI of 7.30%. The interpretation is that CTLT’s business generates a higher return on investment than MYL’s.

Cash Flow 




If there’s one thing investors care more about than earnings, it’s cash flow. MYL’s free cash flow (“FCF”) per share for the trailing twelve months was +0.93. Comparatively, CTLT’s free cash flow per share was +0.32. On a percent-of-sales basis, MYL’s free cash flow was 4.5% while CTLT converted 2.05% of its revenues into cash flow. This means that, for a given level of sales, MYL 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. MYL has a current ratio of 1.50 compared to 2.90 for CTLT. This means that CTLT can more easily cover its most immediate liabilities over the next twelve months. MYL’s debt-to-equity ratio is 1.11 versus a D/E of 2.03 for CTLT. CTLT is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

MYL trades at a forward P/E of 8.65, a P/B of 1.88, and a P/S of 2.09, compared to a forward P/E of 23.09, a P/B of 5.13, and a P/S of 2.59 for CTLT. MYL is the cheaper 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 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. MYL is currently priced at a 3.8% to its one-year price target of 45.00. Comparatively, CTLT is -7.08% relative to its price target of 45.63. This suggests that CTLT 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 MYL and 2.00 for CTLT, which implies that analysts are more bullish on the outlook for MYL.

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. MYL has a beta of 1.42 and CTLT’s beta is 1.40. CTLT’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. MYL has a short ratio of 3.99 compared to a short interest of 2.31 for CTLT. This implies that the market is currently less bearish on the outlook for CTLT.

Summary

Catalent, Inc. (NYSE:CTLT) beats Mylan N.V. (NASDAQ:MYL) on a total of 7 of the 14 factors compared between the two stocks. CTLT is more profitable, generates a higher return on investment and higher liquidity. In terms of valuation, MYL is the cheaper of the two stocks on an earnings, book value and sales basis, CTLT is more undervalued relative to its price target. Finally, CTLT has better sentiment signals based on short interest.

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