Exxon Mobil Corporation (NYSE:XOM) shares are down more than -8.58% this year and recently increased 0.21% or $0.16 to settle at $76.46. Merck & Co., Inc. (NYSE:MRK), on the other hand, is down -2.43% year to date as of 02/14/2018. It currently trades at $54.90 and has returned -1.75% during the past week.
Exxon Mobil Corporation (NYSE:XOM) and Merck & Co., Inc. (NYSE:MRK) 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.
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 XOM to grow earnings at a 21.35% annual rate over the next 5 years. Comparatively, MRK is expected to grow at a 5.64% annual rate. All else equal, XOM’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. 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 19.97% for Merck & Co., Inc. (MRK). XOM’s ROI is 0.60% while MRK has a ROI of 6.40%. The interpretation is that MRK’s business generates a higher return on investment than XOM’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. XOM’s free cash flow (“FCF”) per share for the trailing twelve months was -1.88. Comparatively, MRK’s free cash flow per share was -. On a percent-of-sales basis, XOM’s free cash flow was -3.26% while MRK converted 0% of its revenues into cash flow. This means that, for a given level of sales, MRK 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. XOM has a current ratio of 0.90 compared to 1.40 for MRK. This means that MRK can more easily cover its most immediate liabilities over the next twelve months. XOM’s debt-to-equity ratio is 0.22 versus a D/E of 0.71 for MRK. MRK is therefore the more solvent of the two companies, and has lower financial risk.
XOM trades at a forward P/E of 16.46, a P/B of 1.79, and a P/S of 1.29, compared to a forward P/E of 12.48, a P/B of 3.91, and a P/S of 3.73 for MRK. 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. XOM is currently priced at a -12.83% to its one-year price target of 87.71. Comparatively, MRK is -18.06% relative to its price target of 67.00. This suggests that MRK 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 2.80 for XOM and 2.10 for MRK, which implies that analysts are more bullish on the outlook for XOM.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. XOM has a beta of 0.91 and MRK’s beta is 0.78. MRK’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.XOM has a short ratio of 2.72 compared to a short interest of 1.77 for MRK. This implies that the market is currently less bearish on the outlook for MRK.
Merck & Co., Inc. (NYSE:MRK) beats Exxon Mobil Corporation (NYSE:XOM) on a total of 10 of the 14 factors compared between the two stocks. MRK is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. MRK is more undervalued relative to its price target. Finally, MRK has better sentiment signals based on short interest.