Zoetis Inc. (NYSE:ZTS) shares are up more than 6.51% this year and recently decreased -2.07% or -$1.62 to settle at $76.73. Adamas Pharmaceuticals, Inc. (NASDAQ:ADMS), on the other hand, is up 11.66% year to date as of 01/31/2018. It currently trades at $37.84 and has returned -6.82% during the past week.
Zoetis Inc. (NYSE:ZTS) and Adamas Pharmaceuticals, Inc. (NASDAQ:ADMS) are the two most active stocks in the Drugs – Generic 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.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect ZTS to grow earnings at a 14.90% 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. Zoetis Inc. (ZTS) has an EBITDA margin of 33.84%. This suggests that ZTS underlying business is more profitable ZTS’s ROI is 13.80% while ADMS has a ROI of -46.00%. The interpretation is that ZTS’s business generates a higher return on investment than ADMS’s.
Cash is king when it comes to investing. ZTS’s free cash flow (“FCF”) per share for the trailing twelve months was +0.69. Comparatively, ADMS’s free cash flow per share was -0.70. On a percent-of-sales basis, ZTS’s free cash flow was 6.88% while ADMS converted -2.8% of its revenues into cash flow. This means that, for a given level of sales, ZTS is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. ZTS has a current ratio of 2.80 compared to 8.30 for ADMS. This means that ADMS can more easily cover its most immediate liabilities over the next twelve months. ZTS’s debt-to-equity ratio is 2.87 versus a D/E of 0.41 for ADMS. ZTS is therefore the more solvent of the two companies, and has lower financial risk.
ZTS trades at a forward P/E of 26.08, a P/B of 18.85, and a P/S of 7.32, compared to a P/B of 9.93, and a P/S of 21162.02 for ADMS. ZTS is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B 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 isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. ZTS is currently priced at a -5.2% to its one-year price target of 80.94. Comparatively, ADMS is -36.18% relative to its price target of 59.29. This suggests that ADMS 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 1.90 for ZTS and 1.90 for ADMS, which implies that analysts are equally bullish on their outlook for the two stocks.
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. ZTS has a beta of 1.10 and ADMS’s beta is 1.29. ZTS’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. ZTS has a short ratio of 2.81 compared to a short interest of 7.16 for ADMS. This implies that the market is currently less bearish on the outlook for ZTS.
Zoetis Inc. (NYSE:ZTS) beats Adamas Pharmaceuticals, Inc. (NASDAQ:ADMS) on a total of 8 of the 14 factors compared between the two stocks. ZTS is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. Finally, ZTS has better sentiment signals based on short interest.