International Business Machines Corporation (NYSE:IBM) shares are down more than -1.74% this year and recently decreased -0.43% or -$0.65 to settle at $150.75. NCR Corporation (NYSE:NCR), on the other hand, is down -7.44% year to date as of 02/13/2018. It currently trades at $31.46 and has returned -10.50% during the past week.
International Business Machines Corporation (NYSE:IBM) and NCR Corporation (NYSE:NCR) are the two most active stocks in the Information Technology Services industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
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 IBM to grow earnings at a 2.92% annual rate over the next 5 years. Comparatively, NCR is expected to grow at a 15.00% annual rate. All else equal, NCR’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 14.53% for NCR Corporation (NCR). IBM’s ROI is 19.70% while NCR has a ROI of 13.40%. The interpretation is that IBM’s business generates a higher return on investment than NCR’s.
If there’s one thing investors care more about than earnings, it’s cash flow. IBM’s free cash flow (“FCF”) per share for the trailing twelve months was +3.58. Comparatively, NCR’s free cash flow per share was +3.58. On a percent-of-sales basis, IBM’s free cash flow was 4.19% while NCR converted 6.7% of its revenues into cash flow. This means that, for a given level of sales, NCR 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. IBM has a current ratio of 1.40 compared to 1.40 for NCR. This means that IBM can more easily cover its most immediate liabilities over the next twelve months. IBM’s debt-to-equity ratio is 2.32 versus a D/E of 4.22 for NCR. NCR is therefore the more solvent of the two companies, and has lower financial risk.
IBM trades at a forward P/E of 10.62, a P/B of 7.14, and a P/S of 1.77, compared to a forward P/E of 8.61, a P/B of 4.96, and a P/S of 0.64 for NCR. IBM 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 isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. IBM is currently priced at a -11.71% to its one-year price target of 170.75. Comparatively, NCR is -27.68% relative to its price target of 43.50. This suggests that NCR 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 IBM and 1.80 for NCR, which implies that analysts are more bullish on the outlook for IBM.
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. IBM has a beta of 0.94 and NCR’s beta is 1.71. IBM’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. IBM has a short ratio of 3.40 compared to a short interest of 4.63 for NCR. This implies that the market is currently less bearish on the outlook for IBM.
NCR Corporation (NYSE:NCR) beats International Business Machines Corporation (NYSE:IBM) on a total of 7 of the 14 factors compared between the two stocks. NCR is more profitable and has a higher cash conversion rate. In terms of valuation, NCR is the cheaper of the two stocks on an earnings, book value and sales basis, NCR is more undervalued relative to its price target. Finally, AJG has better sentiment signals based on short interest.