Emerson Electric Co. (NYSE:EMR) shares are up more than 0.99% this year and recently increased 0.10% or $0.07 to settle at $70.38. Capstone Turbine Corporation (NASDAQ:CPST), on the other hand, is up 14.29% year to date as of 02/13/2018. It currently trades at $0.88 and has returned 22.05% during the past week.
Emerson Electric Co. (NYSE:EMR) and Capstone Turbine Corporation (NASDAQ:CPST) are the two most active stocks in the Industrial Electrical Equipment industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect EMR to grow earnings at a 8.50% annual rate over the next 5 years. Comparatively, CPST is expected to grow at a 15.00% annual rate. All else equal, CPST’s higher growth rate would imply a greater potential for capital appreciation.
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. Emerson Electric Co. (EMR) has an EBITDA margin of 24.66%. This suggests that EMR underlying business is more profitable EMR’s ROI is 13.70% while CPST has a ROI of -70.20%. The interpretation is that EMR’s business generates a higher return on investment than CPST’s.
Cash is king when it comes to investing. EMR’s free cash flow (“FCF”) per share for the trailing twelve months was +0.06. Comparatively, CPST’s free cash flow per share was -0.09. On a percent-of-sales basis, EMR’s free cash flow was 0.25% while CPST converted -0.01% of its revenues into cash flow. This means that, for a given level of sales, EMR 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. EMR has a current ratio of 1.30 compared to 1.50 for CPST. This means that CPST can more easily cover its most immediate liabilities over the next twelve months. EMR’s debt-to-equity ratio is 0.65 versus a D/E of 0.51 for CPST. EMR is therefore the more solvent of the two companies, and has lower financial risk.
EMR trades at a forward P/E of 19.99, a P/B of 5.38, and a P/S of 2.83, compared to a P/B of 1.83, and a P/S of 0.49 for CPST. EMR is the expensive of the two stocks on an earnings, book value and sales basis. 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. EMR is currently priced at a -0.87% to its one-year price target of 71.00. Comparatively, CPST is -48.24% relative to its price target of 1.70. This suggests that CPST 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 2.60 for EMR and 2.00 for CPST, which implies that analysts are more bullish on the outlook for EMR.
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. EMR has a beta of 1.13 and CPST’s beta is 0.26. CPST’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.EMR has a short ratio of 1.89 compared to a short interest of 5.66 for CPST. This implies that the market is currently less bearish on the outlook for EMR.
Capstone Turbine Corporation (NASDAQ:CPST) beats Emerson Electric Co. (NYSE:EMR) on a total of 9 of the 14 factors compared between the two stocks. CPST is more profitable, higher liquidity and has lower financial risk. In terms of valuation, CPST is the cheaper of the two stocks on an earnings, book value and sales basis, CPST is more undervalued relative to its price target. Finally, MWA has better sentiment signals based on short interest.