Canadian National Railway Company (NYSE:CNI) shares are up more than 0.82% this year and recently increased 3.02% or $2.44 to settle at $83.18. Aralez Pharmaceuticals Inc. (NASDAQ:ARLZ), on the other hand, is down -66.63% year to date as of 05/16/2018. It currently trades at $0.47 and has returned 16.07% during the past week.
Canadian National Railway Company (NYSE:CNI) and Aralez Pharmaceuticals Inc. (NASDAQ:ARLZ) are the two most active stocks in the Railroads industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.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 CNI to grow earnings at a 7.31% annual rate over the next 5 years. Comparatively, ARLZ is expected to grow at a 30.00% annual rate. All else equal, ARLZ’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Canadian National Railway Company (CNI) has an EBITDA margin of 19.46%. This suggests that CNI underlying business is more profitable CNI’s ROI is 28.10% while ARLZ has a ROI of -31.10%. The interpretation is that CNI’s business generates a higher return on investment than ARLZ’s.Cash Flow
The amount of free cash flow available to investors is ultimately what determines the value of a stock. CNI’s free cash flow (“FCF”) per share for the trailing twelve months was -0.01. Comparatively, ARLZ’s free cash flow per share was +0.28. On a percent-of-sales basis, CNI’s free cash flow was -0.07% while ARLZ converted 0.02% of its revenues into cash flow. This means that, for a given level of sales, ARLZ 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. CNI has a current ratio of 0.60 compared to 0.80 for ARLZ. This means that ARLZ can more easily cover its most immediate liabilities over the next twelve months. CNI’s debt-to-equity ratio is 0.72 versus a D/E of 0.00 for ARLZ. CNI is therefore the more solvent of the two companies, and has lower financial risk.Valuation
CNI trades at a forward P/E of 18.23, a P/B of 4.75, and a P/S of 6.07, compared to a P/B of 2.06, and a P/S of 0.30 for ARLZ. CNI 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
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. CNI is currently priced at a 3.47% to its one-year price target of 80.39. Comparatively, ARLZ is -89.15% relative to its price target of 4.33. This suggests that ARLZ is the better investment over the next year.
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. CNI has a short ratio of 4.87 compared to a short interest of 2.56 for ARLZ. This implies that the market is currently less bearish on the outlook for ARLZ.Summary
Aralez Pharmaceuticals Inc. (NASDAQ:ARLZ) beats Canadian National Railway Company (NYSE:CNI) on a total of 12 of the 14 factors compared between the two stocks. ARLZ is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, ARLZ is the cheaper of the two stocks on an earnings, book value and sales basis, ARLZ is more undervalued relative to its price target. Finally, ARLZ has better sentiment signals based on short interest.