Synchrony Financial (NYSE:SYF) shares are down more than -15.41% this year and recently decreased -2.59% or -$0.87 to settle at $32.66. Caterpillar Inc. (NYSE:CAT), on the other hand, is down -8.69% year to date as of 04/02/2018. It currently trades at $143.89 and has returned -0.28% during the past week.
Synchrony Financial (NYSE:SYF) and Caterpillar Inc. (NYSE:CAT) are the two most active stocks in the Credit Services industry 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.Growth
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect SYF to grow earnings at a 17.09% annual rate over the next 5 years. Comparatively, CAT is expected to grow at a 19.89% annual rate. All else equal, CAT’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 15.31% for Caterpillar Inc. (CAT). SYF’s ROI is 24.20% while CAT has a ROI of 7.30%. The interpretation is that SYF’s business generates a higher return on investment than CAT’s.Cash Flow
Cash is king when it comes to investing. SYF’s free cash flow (“FCF”) per share for the trailing twelve months was +3.00. Comparatively, CAT’s free cash flow per share was -1.04. On a percent-of-sales basis, SYF’s free cash flow was 13.66% while CAT converted -1.37% of its revenues into cash flow. This means that, for a given level of sales, SYF is able to generate more free cash flow for investors.Liquidity and Financial Risk
SYF’s debt-to-equity ratio is 1.46 versus a D/E of 2.55 for CAT. CAT is therefore the more solvent of the two companies, and has lower financial risk.
SYF trades at a forward P/E of 7.73, a P/B of 1.79, and a P/S of 1.54, compared to a forward P/E of 13.59, a P/B of 6.26, and a P/S of 1.86 for CAT. SYF 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
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. SYF is currently priced at a -28.06% to its one-year price target of 45.40. Comparatively, CAT is -20.06% relative to its price target of 180.00. This suggests that SYF is the better investment over the next year.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. SYF has a beta of 1.13 and CAT’s beta is 1.29. SYF’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. SYF has a short ratio of 1.61 compared to a short interest of 1.57 for CAT. This implies that the market is currently less bearish on the outlook for CAT.Summary
Synchrony Financial (NYSE:SYF) beats Caterpillar Inc. (NYSE:CAT) on a total of 11 of the 14 factors compared between the two stocks. SYF is more profitable, 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, SYF is the cheaper of the two stocks on an earnings, book value and sales basis, SYF is more undervalued relative to its price target. Finally, MDLZ has better sentiment signals based on short interest.