Finance

Critical Comparison: Vodafone Group Plc (VOD) vs. Office Depot, Inc. (ODP)

Vodafone Group Plc (NASDAQ:VOD) shares are down more than -15.24% this year and recently decreased -4.69% or -$1.33 to settle at $27.04. Office Depot, Inc. (NASDAQ:ODP), on the other hand, is down -33.90% year to date as of 05/15/2018. It currently trades at $2.34 and has returned -1.27% during the past week.

Vodafone Group Plc (NASDAQ:VOD) and Office Depot, Inc. (NASDAQ:ODP) are the two most active stocks in the Wireless Communications 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 VOD to grow earnings at a 11.20% annual rate over the next 5 years. Comparatively, ODP is expected to grow at a -6.90% annual rate. All else equal, VOD’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. EBITDA margin of 5.01% for Office Depot, Inc. (ODP). VOD’s ROI is -0.90% while ODP has a ROI of 3.10%. The interpretation is that ODP’s business generates a higher return on investment than VOD’s.

Cash Flow



The amount of free cash flow available to investors is ultimately what determines the value of a stock. On a percent-of-sales basis, VOD’s free cash flow was 0% while ODP converted 1.53% of its revenues into cash flow. This means that, for a given level of sales, ODP is able to generate more free cash flow for investors.

Valuation

VOD trades at a forward P/E of 18.58, a P/B of 0.91, and a P/S of 1.28, compared to a forward P/E of 7.09, a P/B of 0.60, and a P/S of 0.12 for ODP. VOD is the expensive 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

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. VOD is currently priced at a -23.53% to its one-year price target of 35.36. Comparatively, ODP is -24.52% relative to its price target of 3.10. This suggests that ODP is the better investment over the next year.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. VOD has a beta of 0.84 and ODP’s beta is 2.61. VOD’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. VOD has a short ratio of 3.50 compared to a short interest of 3.78 for ODP. This implies that the market is currently less bearish on the outlook for VOD.

Summary




Office Depot, Inc. (NASDAQ:ODP) beats Vodafone Group Plc (NASDAQ:VOD) on a total of 9 of the 14 factors compared between the two stocks. ODP is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, ODP is the cheaper of the two stocks on an earnings, book value and sales basis, ODP is more undervalued relative to its price target. Finally, PHM has better sentiment signals based on short interest.

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