Moody’s Corporation (NYSE:MCO) shares are up more than 10.81% this year and recently increased 1.10% or $1.78 to settle at $163.57. Healthcare Services Group, Inc. (NASDAQ:HCSG), on the other hand, is up 3.83% year to date as of 02/01/2018. It currently trades at $54.74 and has returned 0.55% during the past week.
Moody’s Corporation (NYSE:MCO) and Healthcare Services Group, Inc. (NASDAQ:HCSG) are the two most active stocks in the Business Services industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
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 MCO to grow earnings at a 13.19% annual rate over the next 5 years. Comparatively, HCSG is expected to grow at a 15.62% annual rate. All else equal, HCSG’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 7.76% for Healthcare Services Group, Inc. (HCSG). MCO’s ROI is 16.70% while HCSG has a ROI of 22.10%. The interpretation is that HCSG’s business generates a higher return on investment than MCO’s.
Cash is king when it comes to investing. MCO’s free cash flow (“FCF”) per share for the trailing twelve months was +1.50. Comparatively, HCSG’s free cash flow per share was -0.07. On a percent-of-sales basis, MCO’s free cash flow was 7.95% while HCSG converted -0.33% of its revenues into cash flow. This means that, for a given level of sales, MCO is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. MCO has a current ratio of 1.10 compared to 2.90 for HCSG. This means that HCSG can more easily cover its most immediate liabilities over the next twelve months.
MCO trades at a forward P/E of 24.25, and a P/S of 7.85, compared to a forward P/E of 37.29, a P/B of 10.29, and a P/S of 2.21 for HCSG. 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. MCO is currently priced at a -0.37% to its one-year price target of 164.17. Comparatively, HCSG is -6.43% relative to its price target of 58.50. This suggests that HCSG 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 2.50 for MCO and 2.00 for HCSG, which implies that analysts are more bullish on the outlook for MCO.
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. MCO has a beta of 1.36 and HCSG’s beta is 0.59. HCSG’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. MCO has a short ratio of 3.41 compared to a short interest of 11.31 for HCSG. This implies that the market is currently less bearish on the outlook for MCO.
Healthcare Services Group, Inc. (NASDAQ:HCSG) beats Moody’s Corporation (NYSE:MCO) on a total of 7 of the 14 factors compared between the two stocks. HCSG is more profitable, generates a higher return on investment and higher liquidity. HCSG is more undervalued relative to its price target. Finally, FISV has better sentiment signals based on short interest.