Earnings

A Side-by-side Analysis of Kratos Defense & Security Solutions, Inc. (KTOS) and Johnson Controls International plc (JCI)

Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) shares are down more than -12.04% this year and recently increased 0.38% or $0.03 to settle at $9.31. Johnson Controls International plc (NYSE:JCI), on the other hand, is down -4.46% year to date as of 03/19/2018. It currently trades at $36.41 and has returned -5.92% during the past week.

Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) and Johnson Controls International plc (NYSE:JCI) 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.

Growth

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 KTOS to grow earnings at a 13.00% annual rate over the next 5 years. Comparatively, JCI is expected to grow at a 11.15% annual rate. All else equal, KTOS’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 EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 12.53% for Johnson Controls International plc (JCI). KTOS’s ROI is -6.80% while JCI has a ROI of 5.40%. The interpretation is that JCI’s business generates a higher return on investment than KTOS’s.

Cash Flow 




Cash is king when it comes to investing. On a percent-of-sales basis, KTOS’s free cash flow was -0% while JCI converted 0% of its revenues into cash flow. This means that, for a given level of sales, KTOS is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. KTOS has a current ratio of 2.50 compared to 1.10 for JCI. This means that KTOS can more easily cover its most immediate liabilities over the next twelve months. KTOS’s debt-to-equity ratio is 0.58 versus a D/E of 0.61 for JCI. JCI is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

KTOS trades at a forward P/E of 27.24, a P/B of 1.87, and a P/S of 1.44, compared to a forward P/E of 11.97, a P/B of 1.64, and a P/S of 1.12 for JCI. KTOS 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

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. KTOS is currently priced at a -31.44% to its one-year price target of 13.58. Comparatively, JCI is -14.91% relative to its price target of 42.79. This suggests that KTOS 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 2.30 for KTOS and 2.70 for JCI, which implies that analysts are more bullish on the outlook for JCI.

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. KTOS has a beta of 1.74 and JCI’s beta is 0.85. JCI’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.KTOS has a short ratio of 5.59 compared to a short interest of 4.58 for JCI. This implies that the market is currently less bearish on the outlook for JCI.

Summary

Johnson Controls International plc (NYSE:JCI) beats Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) on a total of 8 of the 14 factors compared between the two stocks. JCI is growing fastly, generates a higher return on investment and has higher cash flow per share. In terms of valuation, JCI is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, JCI has better sentiment signals based on short interest.

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