General Motors Company (NYSE:GM) shares are up more than 2.00% this year and recently increased 0.99% or $0.41 to settle at $41.81. Gilead Sciences, Inc. (NASDAQ:GILD), on the other hand, is up 14.21% year to date as of 02/14/2018. It currently trades at $81.82 and has returned -1.14% during the past week.
General Motors Company (NYSE:GM) and Gilead Sciences, Inc. (NASDAQ:GILD) 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.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect GM to grow earnings at a 14.55% annual rate over the next 5 years. Comparatively, GILD is expected to grow at a -9.10% annual rate. All else equal, GM’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 62.85% for Gilead Sciences, Inc. (GILD). GM’s ROI is -1.20% while GILD has a ROI of 31.00%. The interpretation is that GILD’s business generates a higher return on investment than GM’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. GM’s free cash flow (“FCF”) per share for the trailing twelve months was -0.07. Comparatively, GILD’s free cash flow per share was -. On a percent-of-sales basis, GM’s free cash flow was -0.07% while GILD converted 0% of its revenues into cash flow. This means that, for a given level of sales, GILD is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. GM has a current ratio of 0.90 compared to 3.70 for GILD. This means that GILD can more easily cover its most immediate liabilities over the next twelve months. GM’s debt-to-equity ratio is 2.69 versus a D/E of 1.18 for GILD. GM is therefore the more solvent of the two companies, and has lower financial risk.
GM trades at a forward P/E of 6.62, a P/B of 1.69, and a P/S of 0.40, compared to a forward P/E of 12.40, a P/B of 4.30, and a P/S of 4.09 for GILD. GM is the cheaper 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”. GM is currently priced at a -12.66% to its one-year price target of 47.87. Comparatively, GILD is -7.33% relative to its price target of 88.29. This suggests that GM 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 2.50 for GM and 2.20 for GILD, which implies that analysts are more bullish on the outlook for GM.
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. GM has a beta of 1.43 and GILD’s beta is 1.17. GILD’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. GM has a short ratio of 2.64 compared to a short interest of 2.57 for GILD. This implies that the market is currently less bearish on the outlook for GILD.
Gilead Sciences, Inc. (NASDAQ:GILD) beats General Motors Company (NYSE:GM) on a total of 9 of the 14 factors compared between the two stocks. GILD is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, GM is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, GILD has better sentiment signals based on short interest.