Kinder Morgan, Inc. (NYSE:KMI) shares are down more than -16.93% this year and recently increased 0.74% or $0.11 to settle at $15.01. Arconic Inc. (NYSE:ARNC), on the other hand, is down -17.98% year to date as of 04/03/2018. It currently trades at $22.35 and has returned -4.41% during the past week.
Kinder Morgan, Inc. (NYSE:KMI) and Arconic Inc. (NYSE:ARNC) are the two most active stocks in the market based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
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 KMI to grow earnings at a 18.00% annual rate over the next 5 years. Comparatively, ARNC is expected to grow at a 21.46% annual rate. All else equal, ARNC’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 27.39% for Arconic Inc. (ARNC). KMI’s ROI is 0.30% while ARNC has a ROI of 0.50%. The interpretation is that ARNC’s business generates a higher return on investment than KMI’s.
Cash is king when it comes to investing. KMI’s free cash flow (“FCF”) per share for the trailing twelve months was +0.06. Comparatively, ARNC’s free cash flow per share was +0.72. On a percent-of-sales basis, KMI’s free cash flow was 0.97% while ARNC converted 2.68% of its revenues into cash flow. This means that, for a given level of sales, ARNC is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. KMI has a current ratio of 0.40 compared to 2.30 for ARNC. This means that ARNC can more easily cover its most immediate liabilities over the next twelve months. KMI’s debt-to-equity ratio is 1.13 versus a D/E of 1.41 for ARNC. ARNC is therefore the more solvent of the two companies, and has lower financial risk.
KMI trades at a forward P/E of 16.30, a P/B of 1.00, and a P/S of 2.38, compared to a forward P/E of 11.95, a P/B of 2.22, and a P/S of 0.82 for ARNC. KMI is the cheaper of the two stocks on book value basis but is expensive in terms of P/E 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
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. KMI is currently priced at a -31.77% to its one-year price target of 22.00. Comparatively, ARNC is -24.67% relative to its price target of 29.67. This suggests that KMI 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 2.10 for KMI and 2.30 for ARNC, which implies that analysts are more bullish on the outlook for ARNC.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. KMI has a beta of 0.63 and ARNC’s beta is 1.13. KMI’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. KMI has a short ratio of 3.63 compared to a short interest of 3.57 for ARNC. This implies that the market is currently less bearish on the outlook for ARNC.
Arconic Inc. (NYSE:ARNC) beats Kinder Morgan, Inc. (NYSE:KMI) on a total of 8 of the 14 factors compared between the two stocks. ARNC is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, ARNC is the cheaper of the two stocks on an earnings and sales basis, Finally, ARNC has better sentiment signals based on short interest.