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Comparing Valuation And Performance: HP Inc. (HPQ), The Home Depot, Inc. (HD)

The shares of HP Inc. have decreased by more than -2.05% this year alone. The shares recently went up by 0.83% or $0.17 and now trades at $20.58. The shares of The Home Depot, Inc. (NYSE:HD), has slumped by -3.07% year to date as of 02/13/2018. The shares currently trade at $183.72 and have been able to report a change of -3.83% over the past one week.

The stock of HP Inc. and The Home Depot, Inc. were two of the most active stocks on Tuesday. Investors seem to be very interested in what happens to the stocks of these two companies but do investors favor one over the other? We will analyze the growth, profitability, risk, valuation, and insider trends of both companies and see which one investors prefer.

Next 5Y EPS Growth: 6.90% versus 15.66%

When a company is able to grow consistently in terms of earnings at a high compound rate have the highest likelihood of creating value for its shareholders over time. Analysts have predicted that HPQ will grow it’s earning at a 6.90% annual rate in the next 5 years. This is in contrast to HD which will have a positive growth at a 15.66% annual rate. This means that the higher growth rate of HD implies a greater potential for capital appreciation over the years.



Profitability and Returns

Growth alone cannot be used to see if the company will be valuable. Shareholders will be the losers if a company invest in ventures that aren’t profitable enough to support upbeat growth. In order for us to accurately measure profitability and return, we will be using the EBITDA margin and Return on Investment (ROI), which balances the difference in capital structure. HPQ has an EBITDA margin of 6.97%, this implies that the underlying business of HD is more profitable. The ROI of HPQ is 62.80% while that of HD is 31.80%. These figures suggest that HPQ ventures generate a higher ROI than that of HD.

Cash Flow 




The value of a stock is ultimately determined by the amount of cash flow that the investors have available. Over the last 12 months, HPQ’s free cash flow per share is a positive 0.54, while that of HD is positive 0.35.

Liquidity and Financial Risk

The ability of a company to meet up with its short-term obligations and be able to clear its longer-term debts is measured using Liquidity and leverage ratios. The current ratio for HPQ is 1.00 and that of HD is 1.20. This implies that it is easier for HPQ to cover its immediate obligations over the next 12 months than HD.

Valuation

HPQ currently trades at a forward P/E of 10.84, and a P/S of 0.66 while HD trades at a forward P/E of 20.20, a P/B of 84.28, and a P/S of 2.16. This means that looking at the earnings, book values and sales basis, HPQ is the cheaper one. It is very obvious that earnings are the most important factors to investors, thus analysts are most likely to place their bet on the P/E.

Analyst Price Targets and Opinions

The mistake some people make is that they think a cheap stock has more value to it. In order to know the value of a stock, there is need to compare its current price to its likely trading price in the future. The price of HPQ is currently at a -16.1% to its one-year price target of 24.53. Looking at its rival pricing, HD is at a -12.7% relative to its price target of 210.45. This figure implies that over the next one year, HD is a better investment.

When looking at the investment recommendation on say a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell), HPQ is given a 2.30 while 1.80 placed for HD. This means that analysts are more bullish on the outlook for HPQ stocks.

Insider Activity and Investor Sentiment

Short interest or otherwise called the percentage of a stock’s tradable shares currently being shorted is another data that investors use to get a handle on sentiment. The short ratio for HPQ is 2.57 while that of HD is just 2.24. This means that analysts are more bullish on the forecast for HD stock.

Conclusion

The stock of HP Inc. defeats that of The Home Depot, Inc. when the two are compared, with HPQ taking 7 out of the total factors that were been considered. HPQ happens to be more profitable, generates a higher ROI, has higher cash flow per share, higher liquidity and has a lower financial risk. When looking at the stock valuation, HPQ is the cheaper one on an earnings, book value and sales basis. Finally, the sentiment signal for HPQ is better on when it is viewed on short interest.

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