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Comparing Valuation And Performance: Radian Group Inc. (RDN), Infosys Limited (INFY)

The shares of Radian Group Inc. have decreased by more than -3.25% this year alone. The shares recently went down by -10.22% or -$2.27 and now trades at $19.94. The shares of Infosys Limited (NYSE:INFY), has jumped by 13.50% year to date as of 03/12/2018. The shares currently trade at $18.41 and have been able to report a change of 2.28% over the past one week.

The stock of Radian Group Inc. and Infosys Limited were two of the most active stocks on Monday. Investors seem to be very interested in what happens to the stocks of these two companies but do investors favor one over the other? We will analyze the growth, profitability, risk, valuation, and insider trends of both companies and see which one investors prefer.

Next 5Y EPS Growth: 13.83% versus 9.00%

When a company is able to grow consistently in terms of earnings at a high compound rate have the highest likelihood of creating value for its shareholders over time. Analysts have predicted that RDN will grow it’s earning at a 13.83% annual rate in the next 5 years. This is in contrast to INFY which will have a positive growth at a 9.00% annual rate. This means that the higher growth rate of RDN implies a greater potential for capital appreciation over the years.



Profitability and Returns

Growth alone cannot be used to see if the company will be valuable. Shareholders will be the losers if a company invest in ventures that aren’t profitable enough to support upbeat growth. In order for us to accurately measure profitability and return, we will be using the EBITDA margin and Return on Investment (ROI), which balances the difference in capital structure. RDN has an EBITDA margin of 33.52%, this implies that the underlying business of RDN is more profitable. The ROI of RDN is 7.10% while that of INFY is 16.40%. These figures suggest that INFY ventures generate a higher ROI than that of RDN.

Cash Flow 




The value of a stock is ultimately determined by the amount of cash flow that the investors have available. Over the last 12 months, RDN’s free cash flow per share is a positive 0, while that of INFY is positive 50.21.

Liquidity and Financial Risk

The ability of a company to meet up with its short-term obligations and be able to clear its longer-term debts is measured using Liquidity and leverage ratios. The debt ratio of RDN is 0.34 compared to 0.00 for INFY. RDN can be able to settle its long-term debts and thus is a lower financial risk than INFY.

Valuation

RDN currently trades at a forward P/E of 7.42, a P/B of 1.43, and a P/S of 3.52 while INFY trades at a forward P/E of 17.22, a P/B of 3.76, and a P/S of 3.68. This means that looking at the earnings, book values and sales basis, RDN is the cheaper one. It is very obvious that earnings are the most important factors to investors, thus analysts are most likely to place their bet on the P/E.

Analyst Price Targets and Opinions

The mistake some people make is that they think a cheap stock has more value to it. In order to know the value of a stock, there is need to compare its current price to its likely trading price in the future. The price of RDN is currently at a -26.2% to its one-year price target of 27.02. Looking at its rival pricing, INFY is at a 8.49% relative to its price target of 16.97. This figure implies that over the next one year, INFY is a better investment.

When looking at the investment recommendation on say a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell), RDN is given a 1.90 while 2.80 placed for INFY. This means that analysts are more bullish on the outlook for INFY stocks.

Insider Activity and Investor Sentiment

Short interest or otherwise called the percentage of a stock’s tradable shares currently being shorted is another data that investors use to get a handle on sentiment. The short ratio for RDN is 1.07 while that of INFY is just 14.11. This means that analysts are more bullish on the forecast for RDN stock.

Conclusion

The stock of Infosys Limited defeats that of Radian Group Inc. when the two are compared, with INFY taking 6 out of the total factors that were been considered. INFY happens to be more profitable, generates a higher ROI, has higher cash flow per share, higher liquidity and has a lower financial risk. When looking at the stock valuation, INFY is the cheaper one on an earnings, book value and sales basis. Finally, the sentiment signal for INFY is better on when it is viewed on short interest.

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