BHP Billiton Limited (NYSE:BHP) shares are down more than -2.59% this year and recently decreased -1.45% or -$0.66 to settle at $44.80. Brookdale Senior Living Inc. (NYSE:BKD), on the other hand, is down -24.23% year to date as of 03/13/2018. It currently trades at $7.35 and has returned 1.10% during the past week.
BHP Billiton Limited (NYSE:BHP) and Brookdale Senior Living Inc. (NYSE:BKD) are the two most active stocks in the market based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect BHP to grow earnings at a 5.30% annual rate over the next 5 years. Comparatively, BKD is expected to grow at a 10.00% annual rate. All else equal, BKD’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. BHP’s ROI is 8.70% while BKD has a ROI of -5.70%. The interpretation is that BHP’s business generates a higher return on investment than BKD’s.
The value of a stock is simply the present value of its future free cash flows. On a percent-of-sales basis, BHP’s free cash flow was 0% while BKD converted 0.75% of its revenues into cash flow. This means that, for a given level of sales, BKD 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. BHP has a current ratio of 1.70 compared to 0.80 for BKD. This means that BHP can more easily cover its most immediate liabilities over the next twelve months. BHP’s debt-to-equity ratio is 0.49 versus a D/E of 3.36 for BKD. BKD is therefore the more solvent of the two companies, and has lower financial risk.
BHP trades at a forward P/E of 20.76, a P/B of 2.09, and a P/S of 2.89, compared to a P/B of 0.90, and a P/S of 0.29 for BKD. BHP 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
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. BHP is currently priced at a 1.47% to its one-year price target of 44.15. Comparatively, BKD is -28.85% relative to its price target of 10.33. This suggests that BKD 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 BHP and 2.30 for BKD, which implies that analysts are more bullish on the outlook for BKD.
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. BHP has a beta of 1.29 and BKD’s beta is 1.87. BHP’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. BHP has a short ratio of 6.48 compared to a short interest of 5.91 for BKD. This implies that the market is currently less bearish on the outlook for BKD.
Brookdale Senior Living Inc. (NYSE:BKD) beats BHP Billiton Limited (NYSE:BHP) on a total of 8 of the 14 factors compared between the two stocks. BKD generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, BKD is the cheaper of the two stocks on an earnings, book value and sales basis, BKD is more undervalued relative to its price target. Finally, BKD has better sentiment signals based on short interest.