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Fiat Chrysler Automobiles N.V. (FCAU) vs. The Goldman Sachs Group, Inc. (GS): Which is the Better Investment?

Fiat Chrysler Automobiles N.V. (NYSE:FCAU) shares are up more than 31.22% this year and recently increased 0.26% or $0.06 to settle at $23.41. The Goldman Sachs Group, Inc. (NYSE:GS), on the other hand, is up 0.46% year to date as of 04/13/2018. It currently trades at $255.92 and has returned 2.38% during the past week.

Fiat Chrysler Automobiles N.V. (NYSE:FCAU) and The Goldman Sachs Group, Inc. (NYSE:GS) are the two most active stocks in the Auto Manufacturers 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 consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect FCAU to grow earnings at a 20.11% annual rate over the next 5 years. Comparatively, GS is expected to grow at a 22.96% annual rate. All else equal, GS’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. EBITDA margin of 70.04% for The Goldman Sachs Group, Inc. (GS).

Cash Flow



Earnings don’t always accurately reflect the amount of cash that a company brings in. FCAU’s free cash flow (“FCF”) per share for the trailing twelve months was +2.97. Comparatively, GS’s free cash flow per share was -46.41. On a percent-of-sales basis, FCAU’s free cash flow was 4.62% while GS converted -54.97% of its revenues into cash flow. This means that, for a given level of sales, FCAU is able to generate more free cash flow for investors.

Valuation

FCAU trades at a forward P/E of 5.60, a P/B of 1.41, and a P/S of 0.26, compared to a forward P/E of 10.62, a P/B of 1.42, and a P/S of 2.30 for GS. FCAU 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 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. FCAU is currently priced at a -26.1% to its one-year price target of 31.68. Comparatively, GS is -5.45% relative to its price target of 270.68. This suggests that FCAU is the better investment over the next year.

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. FCAU has a short ratio of 4.06 compared to a short interest of 1.66 for GS. This implies that the market is currently less bearish on the outlook for GS.

Summary

Fiat Chrysler Automobiles N.V. (NYSE:FCAU) beats The Goldman Sachs Group, Inc. (NYSE:GS) on a total of 10 of the 14 factors compared between the two stocks. FCAU has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, FCAU is the cheaper of the two stocks on an earnings, book value and sales basis, FCAU is more undervalued relative to its price target. Finally, MA has better sentiment signals based on short interest.

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