Global

KKR & Co. L.P. (KKR) vs. Ichor Holdings, Ltd. (ICHR): Which is the Better Investment?

KKR & Co. L.P. (NYSE:KKR) shares are up more than 5.98% this year and recently increased 3.33% or $0.72 to settle at $22.32. Ichor Holdings, Ltd. (NASDAQ:ICHR), on the other hand, is up 9.67% year to date as of 05/16/2018. It currently trades at $26.98 and has returned 2.78% during the past week.

KKR & Co. L.P. (NYSE:KKR) and Ichor Holdings, Ltd. (NASDAQ:ICHR) are the two most active stocks in the Asset Management 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 KKR to grow earnings at a 10.43% annual rate over the next 5 years. Comparatively, ICHR is expected to grow at a 24.53% annual rate. All else equal, ICHR’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 9.02% for Ichor Holdings, Ltd. (ICHR). KKR’s ROI is 2.90% while ICHR has a ROI of 13.40%. The interpretation is that ICHR’s business generates a higher return on investment than KKR’s.

Cash Flow



The value of a stock is simply the present value of its future free cash flows. KKR’s free cash flow (“FCF”) per share for the trailing twelve months was +0.80. Comparatively, ICHR’s free cash flow per share was -0.17. On a percent-of-sales basis, KKR’s free cash flow was 12.1% while ICHR converted -0% of its revenues into cash flow. This means that, for a given level of sales, KKR is able to generate more free cash flow for investors.

Liquidity and Financial Risk

KKR’s debt-to-equity ratio is 3.19 versus a D/E of 0.80 for ICHR. KKR is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

KKR trades at a forward P/E of 8.86, a P/B of 1.57, and a P/S of 6.34, compared to a forward P/E of 6.20, a P/B of 2.98, and a P/S of 0.93 for ICHR. KKR 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. KKR is currently priced at a -16.5% to its one-year price target of 26.73. Comparatively, ICHR is -32.26% relative to its price target of 39.83. This suggests that ICHR 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. KKR has a short ratio of 2.10 compared to a short interest of 6.41 for ICHR. This implies that the market is currently less bearish on the outlook for KKR.

Summary

Ichor Holdings, Ltd. (NASDAQ:ICHR) beats KKR & Co. L.P. (NYSE:KKR) on a total of 9 of the 14 factors compared between the two stocks. ICHR is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, ICHR is the cheaper of the two stocks on an earnings and sales basis, ICHR is more undervalued relative to its price target. Finally, CHS has better sentiment signals based on short interest.

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