Flowserve Corporation (NYSE:FLS) shares are up more than 3.18% this year and recently increased 2.35% or $1 to settle at $43.47. AMETEK, Inc. (NYSE:AME), on the other hand, is up 2.90% year to date as of 01/11/2018. It currently trades at $74.57 and has returned 0.80% during the past week.
Flowserve Corporation (NYSE:FLS) and AMETEK, Inc. (NYSE:AME) are the two most active stocks in the Diversified Machinery 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.
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 FLS to grow earnings at a 7.00% annual rate over the next 5 years. Comparatively, AME is expected to grow at a 9.35% annual rate. All else equal, AME’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. 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 24.93% for AMETEK, Inc. (AME). FLS’s ROI is 6.00% while AME has a ROI of 11.10%. The interpretation is that AME’s business generates a higher return on investment than FLS’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. FLS’s free cash flow (“FCF”) per share for the trailing twelve months was -0.08. Comparatively, AME’s free cash flow per share was +0.86. On a percent-of-sales basis, FLS’s free cash flow was -0.26% while AME converted 5.18% of its revenues into cash flow. This means that, for a given level of sales, AME 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. FLS has a current ratio of 2.10 compared to 1.60 for AME. This means that FLS can more easily cover its most immediate liabilities over the next twelve months. FLS’s debt-to-equity ratio is 0.91 versus a D/E of 0.65 for AME. FLS is therefore the more solvent of the two companies, and has lower financial risk.
FLS trades at a forward P/E of 23.92, a P/B of 3.25, and a P/S of 1.54, compared to a forward P/E of 25.85, a P/B of 4.56, and a P/S of 4.18 for AME. FLS 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. FLS is currently priced at a -0.87% to its one-year price target of 43.85. Comparatively, AME is -2.68% relative to its price target of 76.62. This suggests that AME 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 2.90 for FLS and 1.60 for AME, which implies that analysts are more bullish on the outlook for FLS.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. FLS has a beta of 1.53 and AME’s beta is 1.33. AME’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. FLS has a short ratio of 7.14 compared to a short interest of 1.97 for AME. This implies that the market is currently less bearish on the outlook for AME.
AMETEK, Inc. (NYSE:AME) beats Flowserve Corporation (NYSE:FLS) on a total of 10 of the 14 factors compared between the two stocks. AME higher liquidity, 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. In terms of valuation, FLS is the cheaper of the two stocks on an earnings, book value and sales basis, AME is more undervalued relative to its price target. Finally, AME has better sentiment signals based on short interest.