KB Home (NYSE:KBH) shares are down more than -6.32% this year and recently increased 1.01% or $0.3 to settle at $29.93. Teck Resources Limited (NYSE:TECK), on the other hand, is up 3.17% year to date as of 03/13/2018. It currently trades at $27.00 and has returned -5.10% during the past week.
KB Home (NYSE:KBH) and Teck Resources Limited (NYSE:TECK) 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.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect KBH to grow earnings at a 21.45% annual rate over the next 5 years. Comparatively, TECK is expected to grow at a -12.07% annual rate. All else equal, KBH’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. KB Home (KBH) has an EBITDA margin of 7%. This suggests that KBH underlying business is more profitable KBH’s ROI is 4.30% while TECK has a ROI of 10.60%. The interpretation is that TECK’s business generates a higher return on investment than KBH’s.
If there’s one thing investors care more about than earnings, it’s cash flow. KBH’s free cash flow (“FCF”) per share for the trailing twelve months was +4.08. Comparatively, TECK’s free cash flow per share was +0.67. On a percent-of-sales basis, KBH’s free cash flow was 8.1% while TECK converted 4.08% of its revenues into cash flow. This means that, for a given level of sales, KBH is able to generate more free cash flow for investors.
Liquidity and Financial Risk
KBH’s debt-to-equity ratio is 1.21 versus a D/E of 0.33 for TECK. KBH is therefore the more solvent of the two companies, and has lower financial risk.
KBH trades at a forward P/E of 9.93, a P/B of 1.35, and a P/S of 0.58, compared to a forward P/E of 9.58, a P/B of 1.04, and a P/S of 1.68 for TECK. KBH is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B 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
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. KBH is currently priced at a -8.25% to its one-year price target of 32.62. Comparatively, TECK is -15.94% relative to its price target of 32.12. This suggests that TECK 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 3.40 for KBH and 2.20 for TECK, which implies that analysts are more bullish on the outlook for KBH.
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. KBH has a beta of 1.46 and TECK’s beta is 1.48. KBH’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. KBH has a short ratio of 4.15 compared to a short interest of 2.61 for TECK. This implies that the market is currently less bearish on the outlook for TECK.
Teck Resources Limited (NYSE:TECK) beats KB Home (NYSE:KBH) on a total of 8 of the 14 factors compared between the two stocks. TECK is growing fastly, higher liquidity and has lower financial risk. In terms of valuation, TECK is the cheaper of the two stocks on an earnings and book value, TECK is more undervalued relative to its price target. Finally, TECK has better sentiment signals based on short interest.