The Coca-Cola Company (NYSE:KO) shares are down more than -3.88% this year and recently decreased -0.20% or -$0.09 to settle at $44.10. Newell Brands Inc. (NYSE:NWL), on the other hand, is down -11.97% year to date as of 02/14/2018. It currently trades at $27.20 and has returned -7.67% during the past week.
The Coca-Cola Company (NYSE:KO) and Newell Brands Inc. (NYSE:NWL) are the two most active stocks in the market based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
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 KO to grow earnings at a 4.80% annual rate over the next 5 years. Comparatively, NWL is expected to grow at a 3.86% annual rate. All else equal, KO’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 16.32% for Newell Brands Inc. (NWL). KO’s ROI is 8.40% while NWL has a ROI of 3.30%. The interpretation is that KO’s business generates a higher return on investment than NWL’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. KO’s free cash flow (“FCF”) per share for the trailing twelve months was +0.14. Comparatively, NWL’s free cash flow per share was -0.06. On a percent-of-sales basis, KO’s free cash flow was 1.42% while NWL converted -0.22% of its revenues into cash flow. This means that, for a given level of sales, KO 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. KO has a current ratio of 1.40 compared to 1.50 for NWL. This means that NWL can more easily cover its most immediate liabilities over the next twelve months. KO’s debt-to-equity ratio is 2.22 versus a D/E of 0.90 for NWL. KO is therefore the more solvent of the two companies, and has lower financial risk.
KO trades at a forward P/E of 21.94, a P/B of 8.51, and a P/S of 5.03, compared to a forward P/E of 10.08, a P/B of 1.05, and a P/S of 0.89 for NWL. KO 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. KO is currently priced at a -11.57% to its one-year price target of 49.87. Comparatively, NWL is -8.01% relative to its price target of 29.57. This suggests that KO 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 2.40 for KO and 2.60 for NWL, which implies that analysts are more bullish on the outlook for NWL.
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. KO has a beta of 0.76 and NWL’s beta is 0.64. NWL’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. KO has a short ratio of 3.46 compared to a short interest of 2.13 for NWL. This implies that the market is currently less bearish on the outlook for NWL.
Newell Brands Inc. (NYSE:NWL) beats The Coca-Cola Company (NYSE:KO) on a total of 7 of the 14 factors compared between the two stocks. NWL is growing fastly and has lower financial risk. In terms of valuation, NWL is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, NWL has better sentiment signals based on short interest.