Eaton Corporation plc (NYSE:ETN) shares are up more than 3.19% this year and recently decreased -1.94% or -$1.61 to settle at $81.53. PACCAR Inc (NASDAQ:PCAR), on the other hand, is down -4.70% year to date as of 03/12/2018. It currently trades at $67.74 and has returned -1.56% during the past week.
Eaton Corporation plc (NYSE:ETN) and PACCAR Inc (NASDAQ:PCAR) 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect ETN to grow earnings at a 8.10% annual rate over the next 5 years. Comparatively, PCAR is expected to grow at a 4.76% annual rate. All else equal, ETN’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. Eaton Corporation plc (ETN) has an EBITDA margin of 22.19%. This suggests that ETN underlying business is more profitable ETN’s ROI is 8.40% while PCAR has a ROI of 9.00%. The interpretation is that PCAR’s business generates a higher return on investment than ETN’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. On a percent-of-sales basis, ETN’s free cash flow was 0% while PCAR converted 1.56% of its revenues into cash flow. This means that, for a given level of sales, PCAR 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. ETN has a current ratio of 1.60 compared to 4.60 for PCAR. This means that PCAR can more easily cover its most immediate liabilities over the next twelve months. ETN’s debt-to-equity ratio is 0.45 versus a D/E of 1.10 for PCAR. PCAR is therefore the more solvent of the two companies, and has lower financial risk.
ETN trades at a forward P/E of 14.45, a P/B of 2.08, and a P/S of 1.76, compared to a forward P/E of 12.10, a P/B of 2.97, and a P/S of 1.21 for PCAR. ETN 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
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”. ETN is currently priced at a -10% to its one-year price target of 90.59. Comparatively, PCAR is -12.03% relative to its price target of 77.00. This suggests that PCAR 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 ETN and 2.60 for PCAR, which implies that analysts are more bullish on the outlook for PCAR.
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. ETN has a beta of 1.38 and PCAR’s beta is 1.20. PCAR’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. ETN has a short ratio of 2.95 compared to a short interest of 4.45 for PCAR. This implies that the market is currently less bearish on the outlook for ETN.
PACCAR Inc (NASDAQ:PCAR) beats Eaton Corporation plc (NYSE:ETN) on a total of 8 of the 14 factors compared between the two stocks. PCAR is growing fastly, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, PCAR is the cheaper of the two stocks on an earnings and sales basis, PCAR is more undervalued relative to its price target. Finally, UTX has better sentiment signals based on short interest.