Earnings

Comparing The Western Union Company (WU) and MetLife, Inc. (MET)

The Western Union Company (NYSE:WU) shares are up more than 6.79% this year and recently increased 2.78% or $0.55 to settle at $20.30. MetLife, Inc. (NYSE:MET), on the other hand, is down -7.63% year to date as of 02/14/2018. It currently trades at $46.70 and has returned 0.95% during the past week.

The Western Union Company (NYSE:WU) and MetLife, Inc. (NYSE:MET) are the two most active stocks in the market 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.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect WU to grow earnings at a 4.63% annual rate over the next 5 years. Comparatively, MET is expected to grow at a 11.39% annual rate. All else equal, MET’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. The Western Union Company (WU) has an EBITDA margin of 12.73%. This suggests that WU underlying business is more profitable WU’s ROI is 10.70% while MET has a ROI of 2.30%. The interpretation is that WU’s business generates a higher return on investment than MET’s.

Cash Flow 




If there’s one thing investors care more about than earnings, it’s cash flow. WU’s free cash flow (“FCF”) per share for the trailing twelve months was +0.75. Comparatively, MET’s free cash flow per share was +4.01. On a percent-of-sales basis, WU’s free cash flow was 6.35% while MET converted 6.65% of its revenues into cash flow. This means that, for a given level of sales, MET is able to generate more free cash flow for investors.

Financial Risk

WU’s debt-to-equity ratio is 4.98 versus a D/E of 0.35 for MET. WU is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

WU trades at a forward P/E of 11.02, a P/B of 13.27, and a P/S of 1.72, compared to a forward P/E of 9.55, a P/B of 0.87, and a P/S of 0.83 for MET. WU 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

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. WU is currently priced at a -0.1% to its one-year price target of 20.32. Comparatively, MET is -16.5% relative to its price target of 55.93. This suggests that MET 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 3.10 for WU and 2.40 for MET, which implies that analysts are more bullish on the outlook for WU.

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. WU has a beta of 1.06 and MET’s beta is 1.23. WU’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. WU has a short ratio of 8.68 compared to a short interest of 1.90 for MET. This implies that the market is currently less bearish on the outlook for MET.

Summary

MetLife, Inc. (NYSE:MET) beats The Western Union Company (NYSE:WU) on a total of 10 of the 14 factors compared between the two stocks. MET is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, MET is the cheaper of the two stocks on an earnings, book value and sales basis, MET is more undervalued relative to its price target. Finally, MET has better sentiment signals based on short interest.

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