Cisco Systems, Inc. (NASDAQ:CSCO) shares are up more than 13.05% this year and recently increased 0.70% or $0.3 to settle at $43.30. Avis Budget Group, Inc. (NASDAQ:CAR), on the other hand, is up 13.04% year to date as of 04/16/2018. It currently trades at $49.60 and has returned 3.18% during the past week.
Cisco Systems, Inc. (NASDAQ:CSCO) and Avis Budget Group, Inc. (NASDAQ:CAR) are the two most active stocks in the Networking & Communication Devices 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 CSCO to grow earnings at a 9.42% annual rate over the next 5 years. Comparatively, CAR is expected to grow at a 6.40% annual rate. All else equal, CSCO’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., compared to an EBITDA margin of 4.89% for Avis Budget Group, Inc. (CAR). CSCO’s ROI is 9.30% while CAR has a ROI of 4.90%. The interpretation is that CSCO’s business generates a higher return on investment than CAR’s.Cash Flow
If there’s one thing investors care more about than earnings, it’s cash flow. CSCO’s free cash flow (“FCF”) per share for the trailing twelve months was +0.49. Comparatively, CAR’s free cash flow per share was -15.94. On a percent-of-sales basis, CSCO’s free cash flow was 4.92% while CAR converted -14.61% of its revenues into cash flow. This means that, for a given level of sales, CSCO is able to generate more free cash flow for investors.Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. CSCO has a current ratio of 2.40 compared to 1.30 for CAR. This means that CSCO can more easily cover its most immediate liabilities over the next twelve months. CSCO’s debt-to-equity ratio is 0.76 versus a D/E of 22.37 for CAR. CAR is therefore the more solvent of the two companies, and has lower financial risk.Valuation
CSCO trades at a forward P/E of 15.17, a P/B of 4.10, and a P/S of 4.37, compared to a forward P/E of 13.01, a P/B of 7.04, and a P/S of 0.46 for CAR. CSCO 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
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. CSCO is currently priced at a -11.36% to its one-year price target of 48.85. Comparatively, CAR is 0.63% relative to its price target of 49.29. This suggests that CSCO is the better investment over the next year.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. CSCO has a beta of 1.14 and CAR’s beta is 2.19. CSCO’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. CSCO has a short ratio of 1.60 compared to a short interest of 8.81 for CAR. This implies that the market is currently less bearish on the outlook for CSCO.Summary
Cisco Systems, Inc. (NASDAQ:CSCO) beats Avis Budget Group, Inc. (NASDAQ:CAR) on a total of 12 of the 14 factors compared between the two stocks. CSCO is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. CSCO is more undervalued relative to its price target. Finally, CSCO has better sentiment signals based on short interest.