Splunk Inc. (NASDAQ:SPLK) shares are up more than 28.48% this year and recently decreased -1.36% or -$1.47 to settle at $106.43. Houlihan Lokey, Inc. (NYSE:HLI), on the other hand, is up 4.42% year to date as of 03/13/2018. It currently trades at $47.44 and has returned 3.13% during the past week.
Splunk Inc. (NASDAQ:SPLK) and Houlihan Lokey, Inc. (NYSE:HLI) are the two most active stocks in the market based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect SPLK to grow earnings at a 44.92% annual rate over the next 5 years. Comparatively, HLI is expected to grow at a 18.10% annual rate. All else equal, SPLK’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. EBITDA margin of 22.72% for Houlihan Lokey, Inc. (HLI). SPLK’s ROI is -43.40% while HLI has a ROI of 14.70%. The interpretation is that HLI’s business generates a higher return on investment than SPLK’s.
Cash is king when it comes to investing. SPLK’s free cash flow (“FCF”) per share for the trailing twelve months was +0.33. Comparatively, HLI’s free cash flow per share was +0.87. On a percent-of-sales basis, SPLK’s free cash flow was 3.67% while HLI converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, SPLK is able to generate more free cash flow for investors.
Liquidity and Financial Risk
SPLK’s debt-to-equity ratio is 0.00 versus a D/E of 0.01 for HLI. HLI is therefore the more solvent of the two companies, and has lower financial risk.
SPLK trades at a forward P/E of 72.85, a P/B of 19.35, and a P/S of 11.76, compared to a forward P/E of 17.42, a P/B of 3.60, and a P/S of 3.08 for HLI. SPLK 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 is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. SPLK is currently priced at a -3.75% to its one-year price target of 110.58. Comparatively, HLI is -13.07% relative to its price target of 54.57. This suggests that HLI 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 SPLK and 2.40 for HLI, which implies that analysts are more bullish on the outlook for HLI.
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. SPLK has a short ratio of 3.70 compared to a short interest of 3.89 for HLI. This implies that the market is currently less bearish on the outlook for SPLK.
Houlihan Lokey, Inc. (NYSE:HLI) beats Splunk Inc. (NASDAQ:SPLK) on a total of 8 of the 14 factors compared between the two stocks. HLI is growing fastly, generates a higher return on investment and has higher cash flow per share. In terms of valuation, HLI is the cheaper of the two stocks on an earnings, book value and sales basis, HLI is more undervalued relative to its price target. Finally, ADM has better sentiment signals based on short interest.