General Electric Company (NYSE:GE) shares are down more than -23.61% this year and recently decreased -1.19% or -$0.16 to settle at $13.33. Radian Group Inc. (NYSE:RDN), on the other hand, is down -22.17% year to date as of 04/16/2018. It currently trades at $16.04 and has returned -0.43% during the past week.
General Electric Company (NYSE:GE) and Radian Group Inc. (NYSE:RDN) are the two most active stocks in the Diversified Machinery 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 consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect GE to grow earnings at a 5.45% annual rate over the next 5 years. Comparatively, RDN is expected to grow at a 13.63% annual rate. All else equal, RDN’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 33.52% for Radian Group Inc. (RDN). GE’s ROI is -0.40% while RDN has a ROI of 7.10%. The interpretation is that RDN’s business generates a higher return on investment than GE’s.Cash Flow
The value of a stock is simply the present value of its future free cash flows. GE’s free cash flow (“FCF”) per share for the trailing twelve months was +0.27. Comparatively, RDN’s free cash flow per share was +0.63. On a percent-of-sales basis, GE’s free cash flow was 1.92% while RDN converted 11.13% of its revenues into cash flow. This means that, for a given level of sales, RDN is able to generate more free cash flow for investors.Financial Risk
GE’s debt-to-equity ratio is 2.09 versus a D/E of 0.34 for RDN. GE is therefore the more solvent of the two companies, and has lower financial risk.
GE trades at a forward P/E of 12.64, a P/B of 1.80, and a P/S of 0.95, compared to a forward P/E of 6.13, a P/B of 1.15, and a P/S of 2.86 for RDN. GE is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B 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. GE is currently priced at a -25.03% to its one-year price target of 17.78. Comparatively, RDN is -39.95% relative to its price target of 26.71. This suggests that RDN 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. GE has a beta of 1.03 and RDN’s beta is 1.51. GE’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. GE has a short ratio of 1.65 compared to a short interest of 1.30 for RDN. This implies that the market is currently less bearish on the outlook for RDN.Summary
Radian Group Inc. (NYSE:RDN) beats General Electric Company (NYSE:GE) on a total of 11 of the 14 factors compared between the two stocks. RDN higher liquidity, 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, RDN is the cheaper of the two stocks on an earnings and book value, RDN is more undervalued relative to its price target. Finally, RDN has better sentiment signals based on short interest.