Viavi Solutions Inc. (NASDAQ:VIAV) shares are up more than 1.49% this year and recently increased 1.60% or $0.14 to settle at $8.87. Harmonic Inc. (NASDAQ:HLIT), on the other hand, is down -4.76% year to date as of 01/11/2018. It currently trades at $4.00 and has returned -1.23% during the past week.
Viavi Solutions Inc. (NASDAQ:VIAV) and Harmonic Inc. (NASDAQ:HLIT) are the two most active stocks in the Communication Equipment 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.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect VIAV to grow earnings at a 10.00% annual rate over the next 5 years. Comparatively, HLIT is expected to grow at a 35.00% annual rate. All else equal, HLIT’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Viavi Solutions Inc. (VIAV) has an EBITDA margin of 18.87%. This suggests that VIAV underlying business is more profitable VIAV’s ROI is -0.50% while HLIT has a ROI of -15.60%. The interpretation is that VIAV’s business generates a higher return on investment than HLIT’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. VIAV’s free cash flow (“FCF”) per share for the trailing twelve months was +0.01. Comparatively, HLIT’s free cash flow per share was -0.14. On a percent-of-sales basis, VIAV’s free cash flow was 0% while HLIT converted -0% of its revenues into cash flow. This means that, for a given level of sales, VIAV is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. VIAV has a current ratio of 2.20 compared to 1.20 for HLIT. This means that VIAV can more easily cover its most immediate liabilities over the next twelve months. VIAV’s debt-to-equity ratio is 1.08 versus a D/E of 0.59 for HLIT. VIAV is therefore the more solvent of the two companies, and has lower financial risk.
VIAV trades at a forward P/E of 18.67, a P/B of 2.64, and a P/S of 2.54, compared to a forward P/E of 21.62, a P/B of 1.48, and a P/S of 0.86 for HLIT. VIAV is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B 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. VIAV is currently priced at a -21.16% to its one-year price target of 11.25. Comparatively, HLIT is -27.27% relative to its price target of 5.50. This suggests that HLIT 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 2.30 for VIAV and 2.20 for HLIT, which implies that analysts are more bullish on the outlook for VIAV.
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. VIAV has a beta of 1.27 and HLIT’s beta is 1.06. HLIT’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. VIAV has a short ratio of 5.87 compared to a short interest of 17.78 for HLIT. This implies that the market is currently less bearish on the outlook for VIAV.
Harmonic Inc. (NASDAQ:HLIT) beats Viavi Solutions Inc. (NASDAQ:VIAV) on a total of 7 of the 14 factors compared between the two stocks. HLIT is more profitable and has lower financial risk. In terms of valuation, HLIT is the cheaper of the two stocks on book value and sales basis, HLIT is more undervalued relative to its price target. Finally, EFII has better sentiment signals based on short interest.