Capital One Financial Corporation (NYSE:COF) shares are up more than 4.86% this year and recently increased 1.24% or $1.28 to settle at $104.42. Equifax Inc. (NYSE:EFX), on the other hand, is up 3.03% year to date as of 01/11/2018. It currently trades at $121.49 and has returned -0.12% during the past week.
Capital One Financial Corporation (NYSE:COF) and Equifax Inc. (NYSE:EFX) are the two most active stocks in the Credit Services 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 grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect COF to grow earnings at a 9.41% annual rate over the next 5 years. Comparatively, EFX is expected to grow at a 9.43% annual rate. All else equal, EFX’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 34.33% for Equifax Inc. (EFX). COF’s ROI is 14.00% while EFX has a ROI of 11.00%. The interpretation is that COF’s business generates a higher return on investment than EFX’s.
If there’s one thing investors care more about than earnings, it’s cash flow. COF’s free cash flow (“FCF”) per share for the trailing twelve months was +6.56. Comparatively, EFX’s free cash flow per share was +1.44. On a percent-of-sales basis, COF’s free cash flow was 11.56% while EFX converted 5.5% of its revenues into cash flow. This means that, for a given level of sales, COF is able to generate more free cash flow for investors.
Liquidity and Financial Risk
COF’s debt-to-equity ratio is 0.91 versus a D/E of 0.87 for EFX. COF is therefore the more solvent of the two companies, and has lower financial risk.
COF trades at a forward P/E of 11.63, a P/B of 1.01, and a P/S of 2.06, compared to a forward P/E of 20.46, a P/B of 4.71, and a P/S of 4.39 for EFX. COF 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. COF is currently priced at a -3.19% to its one-year price target of 107.86. Comparatively, EFX is 0.35% relative to its price target of 121.07. This suggests that COF 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 COF and 2.30 for EFX, which implies that analysts are more bullish on the outlook for EFX.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. COF has a beta of 1.36 and EFX’s beta is 0.92. EFX’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. COF has a short ratio of 3.05 compared to a short interest of 2.75 for EFX. This implies that the market is currently less bearish on the outlook for EFX.
Capital One Financial Corporation (NYSE:COF) beats Equifax Inc. (NYSE:EFX) on a total of 9 of the 14 factors compared between the two stocks. COF is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, COF is the cheaper of the two stocks on an earnings, book value and sales basis, COF is more undervalued relative to its price target.