Earnings

Critical Comparison: GGP Inc. (GGP) vs. Rio Tinto plc (RIO)

GGP Inc. (NYSE:GGP) shares are down more than -6.97% this year and recently decreased -2.64% or -$0.59 to settle at $21.76. Rio Tinto plc (NYSE:RIO), on the other hand, is up 9.65% year to date as of 02/14/2018. It currently trades at $58.04 and has returned 7.68% during the past week.

GGP Inc. (NYSE:GGP) and Rio Tinto plc (NYSE:RIO) are the two most active stocks in the market 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.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect GGP to grow earnings at a 5.70% annual rate over the next 5 years. Comparatively, RIO is expected to grow at a 16.80% annual rate. All else equal, RIO’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. GGP Inc. (GGP) has an EBITDA margin of 74.37%. This suggests that GGP underlying business is more profitable GGP’s ROI is 3.80% while RIO has a ROI of 8.60%. The interpretation is that RIO’s business generates a higher return on investment than GGP’s.

Cash Flow 




Earnings don’t always accurately reflect the amount of cash that a company brings in. GGP’s free cash flow (“FCF”) per share for the trailing twelve months was +0.14. Comparatively, RIO’s free cash flow per share was -. On a percent-of-sales basis, GGP’s free cash flow was 5.76% while RIO converted 0% of its revenues into cash flow. This means that, for a given level of sales, GGP is able to generate more free cash flow for investors.

Liquidity and Financial Risk

GGP’s debt-to-equity ratio is 1.70 versus a D/E of 0.37 for RIO. GGP is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

GGP trades at a forward P/E of 35.38, a P/B of 2.48, and a P/S of 8.61, compared to a forward P/E of 12.12, a P/B of 2.47, and a P/S of 2.56 for RIO. GGP 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. GGP is currently priced at a -12.61% to its one-year price target of 24.90. Comparatively, RIO is -2.4% relative to its price target of 59.47. This suggests that GGP 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 GGP and 1.50 for RIO, which implies that analysts are more bullish on the outlook for GGP.

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. GGP has a beta of 0.82 and RIO’s beta is 1.17. GGP’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. GGP has a short ratio of 3.11 compared to a short interest of 3.65 for RIO. This implies that the market is currently less bearish on the outlook for GGP.

Summary

Rio Tinto plc (NYSE:RIO) beats GGP Inc. (NYSE:GGP) on a total of 8 of the 14 factors compared between the two stocks. RIO is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, RIO is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, FOXA has better sentiment signals based on short interest.

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