Platform Specialty Products Corporation (NYSE:PAH) shares are up more than 2.12% this year and recently increased 3.05% or $0.3 to settle at $10.13. The AES Corporation (NYSE:AES), on the other hand, is down -5.17% year to date as of 02/14/2018. It currently trades at $10.27 and has returned -2.00% during the past week.
Platform Specialty Products Corporation (NYSE:PAH) and The AES Corporation (NYSE:AES) are the two most active stocks in the market based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
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 PAH to grow earnings at a 14.45% annual rate over the next 5 years. Comparatively, AES is expected to grow at a 8.20% annual rate. All else equal, PAH’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 11.86% for The AES Corporation (AES). PAH’s ROI is 2.80% while AES has a ROI of 1.40%. The interpretation is that PAH’s business generates a higher return on investment than AES’s.
The value of a stock is simply the present value of its future free cash flows. PAH’s free cash flow (“FCF”) per share for the trailing twelve months was +0.29. Comparatively, AES’s free cash flow per share was +0.29. On a percent-of-sales basis, PAH’s free cash flow was 2.32% while AES converted 1.41% of its revenues into cash flow. This means that, for a given level of sales, PAH is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. PAH has a current ratio of 2.00 compared to 1.00 for AES. This means that PAH can more easily cover its most immediate liabilities over the next twelve months. PAH’s debt-to-equity ratio is 1.88 versus a D/E of 6.92 for AES. AES is therefore the more solvent of the two companies, and has lower financial risk.
PAH trades at a forward P/E of 10.36, a P/B of 1.00, and a P/S of 0.79, compared to a forward P/E of 8.85, a P/B of 2.13, and a P/S of 0.48 for AES. PAH is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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. PAH is currently priced at a -30.62% to its one-year price target of 14.60. Comparatively, AES is -18.88% relative to its price target of 12.66. This suggests that PAH 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 2.20 for PAH and 2.30 for AES, which implies that analysts are more bullish on the outlook for AES.
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. PAH has a beta of 2.83 and AES’s beta is 1.28. AES’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.PAH has a short ratio of 3.86 compared to a short interest of 2.56 for AES. This implies that the market is currently less bearish on the outlook for AES.
Platform Specialty Products Corporation (NYSE:PAH) beats The AES Corporation (NYSE:AES) on a total of 8 of the 14 factors compared between the two stocks. PAH is growing fastly, generates a higher return on investment, has a higher cash conversion rate, higher liquidity and has lower financial risk. PAH is more undervalued relative to its price target. Finally, VRX has better sentiment signals based on short interest.