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Comparing Valeant Pharmaceuticals International, Inc. (VRX) and Cognex Corporation (CGNX)

Valeant Pharmaceuticals International, Inc. (NYSE:VRX) shares are down more than -17.08% this year and recently increased 0.47% or $0.08 to settle at $17.23. Cognex Corporation (NASDAQ:CGNX), on the other hand, is down -16.86% year to date as of 04/16/2018. It currently trades at $50.85 and has returned 2.31% during the past week.

Valeant Pharmaceuticals International, Inc. (NYSE:VRX) and Cognex Corporation (NASDAQ:CGNX) are the two most active stocks in the Drug Delivery industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect VRX to grow earnings at a -4.49% annual rate over the next 5 years. Comparatively, CGNX is expected to grow at a 27.40% annual rate. All else equal, CGNX’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 37.67% for Cognex Corporation (CGNX). VRX’s ROI is 9.80% while CGNX has a ROI of 15.50%. The interpretation is that CGNX’s business generates a higher return on investment than VRX’s.

Cash Flow



Cash is king when it comes to investing. VRX’s free cash flow (“FCF”) per share for the trailing twelve months was +1.22. Comparatively, CGNX’s free cash flow per share was +0.39. On a percent-of-sales basis, VRX’s free cash flow was 4.88% while CGNX converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, VRX is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. VRX has a current ratio of 1.10 compared to 5.60 for CGNX. This means that CGNX can more easily cover its most immediate liabilities over the next twelve months. VRX’s debt-to-equity ratio is 4.50 versus a D/E of 0.00 for CGNX. VRX is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

VRX trades at a forward P/E of 5.09, a P/B of 1.03, and a P/S of 0.69, compared to a forward P/E of 28.14, a P/B of 8.07, and a P/S of 11.82 for CGNX. VRX 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

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. VRX is currently priced at a 1.17% to its one-year price target of 17.03. Comparatively, CGNX is -22.58% relative to its price target of 65.68. This suggests that CGNX is the better investment over the next year.

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. VRX has a beta of -0.35 and CGNX’s beta is 1.59. VRX’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. VRX has a short ratio of 2.36 compared to a short interest of 3.26 for CGNX. This implies that the market is currently less bearish on the outlook for VRX.

Summary

Cognex Corporation (NASDAQ:CGNX) beats Valeant Pharmaceuticals International, Inc. (NYSE:VRX) on a total of 7 of the 14 factors compared between the two stocks. CGNX has higher cash flow per share, is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, VRX is the cheaper of the two stocks on an earnings, book value and sales basis, CGNX is more undervalued relative to its price target. Finally, WMB has better sentiment signals based on short interest.

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