Earnings

Critical Comparison: The Procter & Gamble Company (PG) vs. Coty Inc. (COTY)

The Procter & Gamble Company (NYSE:PG) shares are down more than -11.48% this year and recently increased 1.76% or $1.41 to settle at $81.33. Coty Inc. (NYSE:COTY), on the other hand, is up 2.66% year to date as of 02/12/2018. It currently trades at $20.42 and has returned 18.17% during the past week.

The Procter & Gamble Company (NYSE:PG) and Coty Inc. (NYSE:COTY) are the two most active stocks in the Personal Products 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.

Growth

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 PG to grow earnings at a 7.47% annual rate over the next 5 years. Comparatively, COTY is expected to grow at a 16.60% annual rate. All else equal, COTY’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 4.36% for Coty Inc. (COTY). PG’s ROI is 12.70% while COTY has a ROI of -1.10%. The interpretation is that PG’s business generates a higher return on investment than COTY’s.

Cash Flow 




The amount of free cash flow available to investors is ultimately what determines the value of a stock. PG’s free cash flow (“FCF”) per share for the trailing twelve months was +0.41. Comparatively, COTY’s free cash flow per share was +0.14. On a percent-of-sales basis, PG’s free cash flow was 1.59% while COTY converted 1.37% of its revenues into cash flow. This means that, for a given level of sales, PG is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. PG has a current ratio of 0.90 compared to 0.90 for COTY. This means that PG can more easily cover its most immediate liabilities over the next twelve months. PG’s debt-to-equity ratio is 0.71 versus a D/E of 0.79 for COTY. COTY is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

PG trades at a forward P/E of 17.93, a P/B of 3.88, and a P/S of 3.15, compared to a forward P/E of 21.89, a P/B of 1.62, and a P/S of 1.68 for COTY. PG 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. PG is currently priced at a -13.41% to its one-year price target of 93.92. Comparatively, COTY is 2.2% relative to its price target of 19.98. This suggests that PG 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 PG and 2.50 for COTY, which implies that analysts are more bullish on the outlook for COTY.

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. PG has a beta of 0.54 and COTY’s beta is 0.25. COTY’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. PG has a short ratio of 4.16 compared to a short interest of 10.04 for COTY. This implies that the market is currently less bearish on the outlook for PG.

Summary

The Procter & Gamble Company (NYSE:PG) beats Coty Inc. (NYSE:COTY) on a total of 10 of the 14 factors compared between the two stocks. PG is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. PG is more undervalued relative to its price target. Finally, PG has better sentiment signals based on short interest.

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