Lowe’s Companies, Inc. (NYSE:LOW) shares are down more than -7.35% this year and recently decreased -1.16% or -$1.01 to settle at $86.11. Adobe Systems Incorporated (NASDAQ:ADBE), on the other hand, is up 23.75% year to date as of 03/07/2018. It currently trades at $216.86 and has returned 3.70% during the past week.
Lowe’s Companies, Inc. (NYSE:LOW) and Adobe Systems Incorporated (NASDAQ:ADBE) 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect LOW to grow earnings at a 16.62% annual rate over the next 5 years. Comparatively, ADBE is expected to grow at a 23.75% annual rate. All else equal, ADBE’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 34.76% for Adobe Systems Incorporated (ADBE). LOW’s ROI is 16.90% while ADBE has a ROI of 16.70%. The interpretation is that LOW’s business generates a higher return on investment than ADBE’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. LOW’s free cash flow (“FCF”) per share for the trailing twelve months was -0.43. Comparatively, ADBE’s free cash flow per share was +1.59. On a percent-of-sales basis, LOW’s free cash flow was -0.52% while ADBE converted 10.74% of its revenues into cash flow. This means that, for a given level of sales, ADBE 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. LOW has a current ratio of 1.00 compared to 2.10 for ADBE. This means that ADBE can more easily cover its most immediate liabilities over the next twelve months. LOW’s debt-to-equity ratio is 2.79 versus a D/E of 0.22 for ADBE. LOW is therefore the more solvent of the two companies, and has lower financial risk.
LOW trades at a forward P/E of 13.89, a P/B of 12.46, and a P/S of 1.07, compared to a forward P/E of 30.56, a P/B of 12.62, and a P/S of 14.62 for ADBE. LOW 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”. LOW is currently priced at a -20.19% to its one-year price target of 107.90. Comparatively, ADBE is -0.16% relative to its price target of 217.20. This suggests that LOW 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 1.90 for LOW and 1.90 for ADBE, which implies that analysts are equally bullish on their outlook for the two stocks.
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. LOW has a beta of 1.32 and ADBE’s beta is 1.08. ADBE’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. LOW has a short ratio of 1.42 compared to a short interest of 1.85 for ADBE. This implies that the market is currently less bearish on the outlook for LOW.
Adobe Systems Incorporated (NASDAQ:ADBE) beats Lowe’s Companies, Inc. (NYSE:LOW) on a total of 7 of the 14 factors compared between the two stocks. ADBE generates a higher return on investment, is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, LOW is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, CBS has better sentiment signals based on short interest.