Williams-Sonoma, Inc. (NYSE:WSM) shares are down more than -6.34% this year and recently increased 0.77% or $0.37 to settle at $48.42. Kellogg Company (NYSE:K), on the other hand, is down -6.10% year to date as of 04/16/2018. It currently trades at $63.83 and has returned -1.01% during the past week.
Williams-Sonoma, Inc. (NYSE:WSM) and Kellogg Company (NYSE:K) are the two most active stocks in the Home Furnishing Stores industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.Growth
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect WSM to grow earnings at a 7.05% annual rate over the next 5 years. Comparatively, K is expected to grow at a 6.76% annual rate. All else equal, WSM’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 18.66% for Kellogg Company (K). WSM’s ROI is 20.10% while K has a ROI of 14.20%. The interpretation is that WSM’s business generates a higher return on investment than K’s.Cash Flow
The value of a stock is simply the present value of its future free cash flows. WSM’s free cash flow (“FCF”) per share for the trailing twelve months was +3.54. Comparatively, K’s free cash flow per share was +0.61. On a percent-of-sales basis, WSM’s free cash flow was 5.63% while K converted 1.63% of its revenues into cash flow. This means that, for a given level of sales, WSM is able to generate more free cash flow for investors.Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. WSM has a current ratio of 1.60 compared to 0.70 for K. This means that WSM can more easily cover its most immediate liabilities over the next twelve months. WSM’s debt-to-equity ratio is 0.00 versus a D/E of 3.89 for K. K is therefore the more solvent of the two companies, and has lower financial risk.Valuation
WSM trades at a forward P/E of 11.16, a P/B of 3.38, and a P/S of 0.78, compared to a forward P/E of 13.57, a P/B of 10.04, and a P/S of 1.72 for K. WSM 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
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. WSM is currently priced at a -8.64% to its one-year price target of 53.00. Comparatively, K is -12.74% relative to its price target of 73.15. This suggests that K 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. WSM has a beta of 0.71 and K’s beta is 0.46. K’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. WSM has a short ratio of 10.12 compared to a short interest of 8.40 for K. This implies that the market is currently less bearish on the outlook for K.Summary
Williams-Sonoma, Inc. (NYSE:WSM) beats Kellogg Company (NYSE:K) on a total of 9 of the 14 factors compared between the two stocks. WSM is growing fastly, 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. In terms of valuation, WSM is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, XOM has better sentiment signals based on short interest.