ServiceNow, Inc. (NYSE:NOW) shares are up more than 13.16% this year and recently increased 0.21% or $0.31 to settle at $147.55. Unisys Corporation (NYSE:UIS), on the other hand, is up 32.52% year to date as of 02/13/2018. It currently trades at $10.80 and has returned 29.34% during the past week.
ServiceNow, Inc. (NYSE:NOW) and Unisys Corporation (NYSE:UIS) are the two most active stocks in the Information Technology Services industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity 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 NOW to grow earnings at a 56.40% annual rate over the next 5 years. Comparatively, UIS is expected to grow at a 9.00% annual rate. All else equal, NOW’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. EBITDA margin of 2.68% for Unisys Corporation (UIS). NOW’s ROI is -47.40% while UIS has a ROI of 1.00%. The interpretation is that UIS’s business generates a higher return on investment than NOW’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. NOW’s free cash flow (“FCF”) per share for the trailing twelve months was +0.86. Comparatively, UIS’s free cash flow per share was +2.38. On a percent-of-sales basis, NOW’s free cash flow was 7.69% while UIS converted 4.38% of its revenues into cash flow. This means that, for a given level of sales, NOW 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. NOW has a current ratio of 1.70 compared to 1.40 for UIS. This means that NOW can more easily cover its most immediate liabilities over the next twelve months.
NOW trades at a forward P/E of 50.38, a P/B of 45.97, and a P/S of 13.12, compared to a forward P/E of 6.24, and a P/S of 0.17 for UIS. NOW 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. NOW is currently priced at a -10.79% to its one-year price target of 165.39. Comparatively, UIS is -18.98% relative to its price target of 13.33. This suggests that UIS 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 1.80 for NOW and 2.30 for UIS, which implies that analysts are more bullish on the outlook for UIS.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. NOW has a beta of 1.22 and UIS’s beta is 1.49. NOW’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. NOW has a short ratio of 5.77 compared to a short interest of 22.45 for UIS. This implies that the market is currently less bearish on the outlook for NOW.
Unisys Corporation (NYSE:UIS) beats ServiceNow, Inc. (NYSE:NOW) on a total of 8 of the 14 factors compared between the two stocks. UIS is growing fastly, generates a higher return on investment, has higher cash flow per share and has lower financial risk. In terms of valuation, UIS is the cheaper of the two stocks on an earnings, book value and sales basis, UIS is more undervalued relative to its price target. Finally, XRX has better sentiment signals based on short interest.