Flex Ltd. (NASDAQ:FLEX) shares are up more than 2.22% this year and recently decreased -2.18% or -$0.41 to settle at $18.39. Franklin Resources, Inc. (NYSE:BEN), on the other hand, is down -10.32% year to date as of 03/14/2018. It currently trades at $38.86 and has returned -1.14% during the past week.
Flex Ltd. (NASDAQ:FLEX) and Franklin Resources, Inc. (NYSE:BEN) 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 FLEX to grow earnings at a 16.43% annual rate over the next 5 years. Comparatively, BEN is expected to grow at a 6.07% annual rate. All else equal, FLEX’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., compared to an EBITDA margin of 43.2% for Franklin Resources, Inc. (BEN). FLEX’s ROI is 7.50% while BEN has a ROI of 11.00%. The interpretation is that BEN’s business generates a higher return on investment than FLEX’s.
Cash is king when it comes to investing. FLEX’s free cash flow (“FCF”) per share for the trailing twelve months was -0.03. Comparatively, BEN’s free cash flow per share was +0.65. On a percent-of-sales basis, FLEX’s free cash flow was -0.07% while BEN converted 5.61% of its revenues into cash flow. This means that, for a given level of sales, BEN is able to generate more free cash flow for investors.
Liquidity and Financial Risk
FLEX’s debt-to-equity ratio is 0.99 versus a D/E of 0.09 for BEN. FLEX is therefore the more solvent of the two companies, and has lower financial risk.
FLEX trades at a forward P/E of 13.01, a P/B of 3.26, and a P/S of 0.39, compared to a forward P/E of 11.48, a P/B of 1.82, and a P/S of 3.25 for BEN. FLEX 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 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. FLEX is currently priced at a -13.38% to its one-year price target of 21.23. Comparatively, BEN is -10.42% relative to its price target of 43.38. This suggests that FLEX 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 1.70 for FLEX and 3.20 for BEN, which implies that analysts are more bullish on the outlook for BEN.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. FLEX has a beta of 0.78 and BEN’s beta is 1.63. FLEX’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. FLEX has a short ratio of 4.03 compared to a short interest of 2.73 for BEN. This implies that the market is currently less bearish on the outlook for BEN.
Franklin Resources, Inc. (NYSE:BEN) beats Flex Ltd. (NASDAQ:FLEX) on a total of 8 of the 14 factors compared between the two stocks. BEN is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, BEN is the cheaper of the two stocks on an earnings and book value, Finally, BEN has better sentiment signals based on short interest.