Citigroup Inc. (NYSE:C) shares are down more than -6.22% this year and recently increased 2.77% or $1.88 to settle at $69.78. Cognizant Technology Solutions Corporation (NASDAQ:CTSH), on the other hand, is up 14.94% year to date as of 03/26/2018. It currently trades at $81.63 and has returned -2.60% during the past week.
Citigroup Inc. (NYSE:C) and Cognizant Technology Solutions Corporation (NASDAQ:CTSH) are the two most active stocks in the market based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect C to grow earnings at a 14.08% annual rate over the next 5 years. Comparatively, CTSH is expected to grow at a 13.82% annual rate. All else equal, C’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 21.07% for Cognizant Technology Solutions Corporation (CTSH). C’s ROI is 7.60% while CTSH has a ROI of 16.90%. The interpretation is that CTSH’s business generates a higher return on investment than C’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. C’s free cash flow (“FCF”) per share for the trailing twelve months was -5.62. Comparatively, CTSH’s free cash flow per share was +1.14. On a percent-of-sales basis, C’s free cash flow was -16.42% while CTSH converted 4.53% of its revenues into cash flow. This means that, for a given level of sales, CTSH is able to generate more free cash flow for investors.
Liquidity and Financial Risk
C’s debt-to-equity ratio is 1.20 versus a D/E of 0.08 for CTSH. C is therefore the more solvent of the two companies, and has lower financial risk.
C trades at a forward P/E of 9.46, a P/B of 1.00, and a P/S of 3.12, compared to a forward P/E of 15.92, a P/B of 4.51, and a P/S of 3.31 for CTSH. C is the cheaper 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. C is currently priced at a -17.47% to its one-year price target of 84.55. Comparatively, CTSH is -8.36% relative to its price target of 89.08. This suggests that C 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 C and 1.90 for CTSH, which implies that analysts are more bullish on the outlook for C.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. C has a beta of 1.52 and CTSH’s beta is 1.03. CTSH’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. C has a short ratio of 1.30 compared to a short interest of 2.62 for CTSH. This implies that the market is currently less bearish on the outlook for C.
Cognizant Technology Solutions Corporation (NASDAQ:CTSH) beats Citigroup Inc. (NYSE:C) on a total of 7 of the 14 factors compared between the two stocks. CTSH is growing fastly, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, C is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, AGN has better sentiment signals based on short interest.