Caterpillar Inc. (NYSE:CAT) shares are down more than -1.95% this year and recently decreased -2.37% or -$3.75 to settle at $154.50. Best Buy Co., Inc. (NYSE:BBY), on the other hand, is up 5.23% year to date as of 03/12/2018. It currently trades at $72.05 and has returned -4.01% during the past week.
Caterpillar Inc. (NYSE:CAT) and Best Buy Co., Inc. (NYSE:BBY) 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 CAT to grow earnings at a 19.95% annual rate over the next 5 years. Comparatively, BBY is expected to grow at a 16.20% annual rate. All else equal, CAT’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 6.34% for Best Buy Co., Inc. (BBY). CAT’s ROI is 7.30% while BBY has a ROI of 20.50%. The interpretation is that BBY’s business generates a higher return on investment than CAT’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. CAT’s free cash flow (“FCF”) per share for the trailing twelve months was -1.04. Comparatively, BBY’s free cash flow per share was +0.71. On a percent-of-sales basis, CAT’s free cash flow was -1.37% while BBY converted 0.49% of its revenues into cash flow. This means that, for a given level of sales, BBY is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. CAT has a current ratio of 1.30 compared to 1.20 for BBY. This means that CAT can more easily cover its most immediate liabilities over the next twelve months. CAT’s debt-to-equity ratio is 2.55 versus a D/E of 0.32 for BBY. CAT is therefore the more solvent of the two companies, and has lower financial risk.
CAT trades at a forward P/E of 14.59, a P/B of 6.73, and a P/S of 1.97, compared to a forward P/E of 13.46, a P/B of 5.19, and a P/S of 0.50 for BBY. CAT 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
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”. CAT is currently priced at a -14.19% to its one-year price target of 180.04. Comparatively, BBY is -4.91% relative to its price target of 75.77. This suggests that CAT 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 CAT and 2.90 for BBY, which implies that analysts are more bullish on the outlook for BBY.
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. CAT has a beta of 1.28 and BBY’s beta is 0.92. BBY’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. CAT has a short ratio of 1.68 compared to a short interest of 7.42 for BBY. This implies that the market is currently less bearish on the outlook for CAT.
Best Buy Co., Inc. (NYSE:BBY) beats Caterpillar Inc. (NYSE:CAT) on a total of 8 of the 14 factors compared between the two stocks. BBY is growing fastly, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, BBY is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, MOS has better sentiment signals based on short interest.