The Wendy’s Company (NASDAQ:WEN) shares are up more than 2.07% this year and recently decreased -1.35% or -$0.23 to settle at $16.76. ZTO Express (Cayman) Inc. (NYSE:ZTO), on the other hand, is down -3.28% year to date as of 03/15/2018. It currently trades at $15.33 and has returned -11.85% during the past week.
The Wendy’s Company (NASDAQ:WEN) and ZTO Express (Cayman) Inc. (NYSE:ZTO) are the two most active stocks in the market based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
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 WEN to grow earnings at a 22.85% annual rate over the next 5 years. Comparatively, ZTO is expected to grow at a 1.07% annual rate. All else equal, WEN’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. The Wendy’s Company (WEN) has an EBITDA margin of 28.83%. This suggests that WEN underlying business is more profitable WEN’s ROI is 5.00% while ZTO has a ROI of 10.10%. The interpretation is that ZTO’s business generates a higher return on investment than WEN’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. WEN’s free cash flow (“FCF”) per share for the trailing twelve months was +0.12. Comparatively, ZTO’s free cash flow per share was -. On a percent-of-sales basis, WEN’s free cash flow was 2.35% while ZTO converted 0% of its revenues into cash flow. This means that, for a given level of sales, WEN is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. WEN has a current ratio of 1.80 compared to 3.30 for ZTO. This means that ZTO can more easily cover its most immediate liabilities over the next twelve months. WEN’s debt-to-equity ratio is 4.81 versus a D/E of 0.01 for ZTO. WEN is therefore the more solvent of the two companies, and has lower financial risk.
WEN trades at a forward P/E of 24.61, a P/B of 7.07, and a P/S of 3.24, compared to a forward P/E of 17.34, a P/B of 3.38, and a P/S of 6.43 for ZTO. WEN 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. WEN is currently priced at a -10.28% to its one-year price target of 18.68. Comparatively, ZTO is -20.9% relative to its price target of 19.38. This suggests that ZTO 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 2.00 for WEN and 2.10 for ZTO, which implies that analysts are more bullish on the outlook for ZTO.
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. WEN has a short ratio of 5.80 compared to a short interest of 5.64 for ZTO. This implies that the market is currently less bearish on the outlook for ZTO.
ZTO Express (Cayman) Inc. (NYSE:ZTO) beats The Wendy’s Company (NASDAQ:WEN) on a total of 8 of the 14 factors compared between the two stocks. ZTO is growing fastly, higher liquidity and has lower financial risk. In terms of valuation, ZTO is the cheaper of the two stocks on an earnings and book value, ZTO is more undervalued relative to its price target. Finally, ZTO has better sentiment signals based on short interest.