Earnings

Dissecting the Numbers for Texas Instruments Incorporated (TXN) and Baker Hughes, a GE company (BHGE)

Texas Instruments Incorporated (NASDAQ:TXN) shares are down more than -1.69% this year and recently increased 1.68% or $1.7 to settle at $102.68. Baker Hughes, a GE company (NYSE:BHGE), on the other hand, is down -16.50% year to date as of 02/14/2018. It currently trades at $26.42 and has returned -8.30% during the past week.

Texas Instruments Incorporated (NASDAQ:TXN) and Baker Hughes, a GE company (NYSE:BHGE) 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.

Growth

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 TXN to grow earnings at a 12.26% annual rate over the next 5 years. Comparatively, BHGE is expected to grow at a 57.00% annual rate. All else equal, BHGE’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. Texas Instruments Incorporated (TXN) has an EBITDA margin of 49.21%. This suggests that TXN underlying business is more profitable TXN’s ROI is 24.60% while BHGE has a ROI of 2.70%. The interpretation is that TXN’s business generates a higher return on investment than BHGE’s.

Cash Flow 




Earnings don’t always accurately reflect the amount of cash that a company brings in. TXN’s free cash flow (“FCF”) per share for the trailing twelve months was +1.08. Comparatively, BHGE’s free cash flow per share was -. On a percent-of-sales basis, TXN’s free cash flow was 7.11% while BHGE converted 0% of its revenues into cash flow. This means that, for a given level of sales, TXN is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. TXN has a current ratio of 3.90 compared to 1.90 for BHGE. This means that TXN can more easily cover its most immediate liabilities over the next twelve months. TXN’s debt-to-equity ratio is 0.33 versus a D/E of 0.12 for BHGE. TXN is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

TXN trades at a forward P/E of 18.13, a P/B of 9.23, and a P/S of 6.78, compared to a forward P/E of 16.48, a P/B of 0.28, and a P/S of 1.82 for BHGE. TXN 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. TXN is currently priced at a -14.84% to its one-year price target of 120.58. Comparatively, BHGE is -28.71% relative to its price target of 37.06. This suggests that BHGE 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 TXN and 2.50 for BHGE, which implies that analysts are more bullish on the outlook for BHGE.

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. TXN has a beta of 1.25 and BHGE’s beta is 0.83. BHGE’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. TXN has a short ratio of 2.91 compared to a short interest of 3.49 for BHGE. This implies that the market is currently less bearish on the outlook for TXN.

Summary

Baker Hughes, a GE company (NYSE:BHGE) beats Texas Instruments Incorporated (NASDAQ:TXN) on a total of 7 of the 14 factors compared between the two stocks. BHGE is more profitable and has lower financial risk. In terms of valuation, BHGE is the cheaper of the two stocks on an earnings, book value and sales basis, BHGE is more undervalued relative to its price target. Finally, FCAU has better sentiment signals based on short interest.

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