Micron Technology, Inc. (NASDAQ:MU) shares are up more than 35.12% this year and recently increased 2.49% or $1.35 to settle at $55.56. Schlumberger Limited (NYSE:SLB), on the other hand, is down -4.35% year to date as of 03/26/2018. It currently trades at $64.46 and has returned -0.37% during the past week.
Micron Technology, Inc. (NASDAQ:MU) and Schlumberger Limited (NYSE:SLB) 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 consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect MU to grow earnings at a 30.33% annual rate over the next 5 years. Comparatively, SLB is expected to grow at a 54.20% annual rate. All else equal, SLB’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 5.77% for Schlumberger Limited (SLB). MU’s ROI is 19.20% while SLB has a ROI of -2.20%. The interpretation is that MU’s business generates a higher return on investment than SLB’s.
Cash is king when it comes to investing. MU’s free cash flow (“FCF”) per share for the trailing twelve months was +1.56. Comparatively, SLB’s free cash flow per share was +0.67. On a percent-of-sales basis, MU’s free cash flow was 8.88% while SLB converted 3.05% of its revenues into cash flow. This means that, for a given level of sales, MU is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. MU has a current ratio of 2.40 compared to 1.20 for SLB. This means that MU can more easily cover its most immediate liabilities over the next twelve months. MU’s debt-to-equity ratio is 0.40 versus a D/E of 0.49 for SLB. SLB is therefore the more solvent of the two companies, and has lower financial risk.
MU trades at a forward P/E of 5.76, a P/B of 2.80, and a P/S of 3.02, compared to a forward P/E of 20.25, a P/B of 2.43, and a P/S of 3.00 for SLB. MU is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S 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. MU is currently priced at a -16.68% to its one-year price target of 66.68. Comparatively, SLB is -21.28% relative to its price target of 81.89. This suggests that SLB 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 1.80 for MU and 2.00 for SLB, which implies that analysts are more bullish on the outlook for SLB.
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. MU has a beta of 1.21 and SLB’s beta is 1.07. SLB’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. MU has a short ratio of 1.23 compared to a short interest of 2.65 for SLB. This implies that the market is currently less bearish on the outlook for MU.
Micron Technology, Inc. (NASDAQ:MU) beats Schlumberger Limited (NYSE:SLB) on a total of 9 of the 14 factors compared between the two stocks. MU is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. Finally, MU has better sentiment signals based on short interest.