Colgate-Palmolive Company (NYSE:CL) shares are down more than -6.97% this year and recently increased 0.62% or $0.43 to settle at $70.19. Avon Products, Inc. (NYSE:AVP), on the other hand, is up 1.40% year to date as of 02/12/2018. It currently trades at $2.18 and has returned -3.11% during the past week.
Colgate-Palmolive Company (NYSE:CL) and Avon Products, Inc. (NYSE:AVP) are the two most active stocks in the Personal Products 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 consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect CL to grow earnings at a 8.32% annual rate over the next 5 years.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 5.75% for Avon Products, Inc. (AVP). CL’s ROI is 42.70% while AVP has a ROI of 19.00%. The interpretation is that CL’s business generates a higher return on investment than AVP’s.
If there’s one thing investors care more about than earnings, it’s cash flow. CL’s free cash flow (“FCF”) per share for the trailing twelve months was +0.15. Comparatively, AVP’s free cash flow per share was +0.00. On a percent-of-sales basis, CL’s free cash flow was 0.85% while AVP converted 0% of its revenues into cash flow. This means that, for a given level of sales, CL 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. CL has a current ratio of 1.20 compared to 1.40 for AVP. This means that AVP can more easily cover its most immediate liabilities over the next twelve months.
CL trades at a forward P/E of 20.43, and a P/S of 4.00, compared to a forward P/E of 11.91, and a P/S of 0.17 for AVP. 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. CL is currently priced at a -8.59% to its one-year price target of 76.79. Comparatively, AVP is -12.8% relative to its price target of 2.50. This suggests that AVP 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 2.70 for CL and 3.00 for AVP, which implies that analysts are more bullish on the outlook for AVP.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. CL has a beta of 0.75 and AVP’s beta is 1.63. CL’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.CL has a short ratio of 2.99 compared to a short interest of 3.99 for AVP. This implies that the market is currently less bearish on the outlook for CL.
Colgate-Palmolive Company (NYSE:CL) beats Avon Products, Inc. (NYSE:AVP) on a total of 8 of the 13 factors compared between the two stocks. CL 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, CL has better sentiment signals based on short interest.