Eli Lilly and Company (NYSE:LLY) shares are down more than -5.14% this year and recently increased 0.50% or $0.4 to settle at $80.12. CMS Energy Corporation (NYSE:CMS), on the other hand, is down -4.86% year to date as of 04/16/2018. It currently trades at $45.00 and has returned -0.22% during the past week.
Eli Lilly and Company (NYSE:LLY) and CMS Energy Corporation (NYSE:CMS) are the two most active stocks in the Drug Manufacturers – Major 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 LLY to grow earnings at a 11.41% annual rate over the next 5 years. Comparatively, CMS is expected to grow at a 7.04% annual rate. All else equal, LLY’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Eli Lilly and Company (LLY) has an EBITDA margin of 16.46%. This suggests that LLY underlying business is more profitable LLY’s ROI is 6.60% while CMS has a ROI of 7.10%. The interpretation is that CMS’s business generates a higher return on investment than LLY’s.Cash Flow
The amount of free cash flow available to investors is ultimately what determines the value of a stock. LLY’s free cash flow (“FCF”) per share for the trailing twelve months was +0.68. Comparatively, CMS’s free cash flow per share was -0.16. On a percent-of-sales basis, LLY’s free cash flow was 3.26% while CMS converted -0.69% of its revenues into cash flow. This means that, for a given level of sales, LLY is able to generate more free cash flow for investors.Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. LLY has a current ratio of 1.30 compared to 0.90 for CMS. This means that LLY can more easily cover its most immediate liabilities over the next twelve months. LLY’s debt-to-equity ratio is 1.18 versus a D/E of 2.36 for CMS. CMS is therefore the more solvent of the two companies, and has lower financial risk.Valuation
LLY trades at a forward P/E of 15.07, a P/B of 7.21, and a P/S of 3.81, compared to a forward P/E of 17.96, a P/B of 2.85, and a P/S of 1.92 for CMS. LLY is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B 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
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. LLY is currently priced at a -11.76% to its one-year price target of 90.80. Comparatively, CMS is -6.39% relative to its price target of 48.07. This suggests that LLY is the better investment over the next year.
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. LLY has a beta of 0.26 and CMS’s beta is 0.06. CMS’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. LLY has a short ratio of 2.09 compared to a short interest of 1.72 for CMS. This implies that the market is currently less bearish on the outlook for CMS.Summary
Eli Lilly and Company (NYSE:LLY) beats CMS Energy Corporation (NYSE:CMS) on a total of 9 of the 14 factors compared between the two stocks. LLY is growing fastly, is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. LLY is more undervalued relative to its price target. Finally, HON has better sentiment signals based on short interest.