Vulcan Materials Company (NYSE:VMC) shares are up more than 5.30% this year and recently increased 2.10% or $2.78 to settle at $135.18. Forterra, Inc. (NASDAQ:FRTA), on the other hand, is down -3.96% year to date as of 01/10/2018. It currently trades at $10.66 and has returned -5.66% during the past week.
Vulcan Materials Company (NYSE:VMC) and Forterra, Inc. (NASDAQ:FRTA) are the two most active stocks in the General Building Materials industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
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 VMC to grow earnings at a 17.30% annual rate over the next 5 years.
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. Vulcan Materials Company (VMC) has an EBITDA margin of 25.79%. This suggests that VMC underlying business is more profitable VMC’s ROI is 8.50% while FRTA has a ROI of 9.30%. The interpretation is that FRTA’s business generates a higher return on investment than VMC’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. VMC’s free cash flow (“FCF”) per share for the trailing twelve months was +1.00. Comparatively, FRTA’s free cash flow per share was +1.23. On a percent-of-sales basis, VMC’s free cash flow was 3.68% while FRTA converted 5.8% of its revenues into cash flow. This means that, for a given level of sales, FRTA 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. VMC has a current ratio of 4.20 compared to 2.60 for FRTA. This means that VMC can more easily cover its most immediate liabilities over the next twelve months. VMC’s debt-to-equity ratio is 0.60 versus a D/E of 13.53 for FRTA. FRTA is therefore the more solvent of the two companies, and has lower financial risk.
VMC trades at a forward P/E of 32.72, a P/B of 3.82, and a P/S of 4.78, compared to a P/B of 7.72, and a P/S of 0.45 for FRTA. VMC 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
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”. VMC is currently priced at a -4.7% to its one-year price target of 141.85. Comparatively, FRTA is 47.03% relative to its price target of 7.25. This suggests that VMC 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 VMC and 2.80 for FRTA, which implies that analysts are more bullish on the outlook for FRTA.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. VMC has a short ratio of 3.36 compared to a short interest of 5.55 for FRTA. This implies that the market is currently less bearish on the outlook for VMC.
Vulcan Materials Company (NYSE:VMC) beats Forterra, Inc. (NASDAQ:FRTA) on a total of 8 of the 14 factors compared between the two stocks. VMC is growing fastly, is more profitable, higher liquidity and has lower financial risk. VMC is more undervalued relative to its price target. Finally, VMC has better sentiment signals based on short interest.