NeoPhotonics Corporation (NYSE:NPTN) shares are down more than -1.82% this year and recently increased 3.69% or $0.23 to settle at $6.46. Pier 1 Imports, Inc. (NYSE:PIR), on the other hand, is down -45.65% year to date as of 05/16/2018. It currently trades at $2.25 and has returned 1.81% during the past week.
NeoPhotonics Corporation (NYSE:NPTN) and Pier 1 Imports, Inc. (NYSE:PIR) are the two most active stocks in the Semiconductor – Broad Line 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 NPTN to grow earnings at a 15.00% annual rate over the next 5 years. Comparatively, PIR is expected to grow at a -3.00% annual rate. All else equal, NPTN’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. EBITDA margin of 5.08% for Pier 1 Imports, Inc. (PIR). NPTN’s ROI is -29.70% while PIR has a ROI of 4.40%. The interpretation is that PIR’s business generates a higher return on investment than NPTN’s.Cash Flow
Cash is king when it comes to investing. NPTN’s free cash flow (“FCF”) per share for the trailing twelve months was -0.27. Comparatively, PIR’s free cash flow per share was +0.69. On a percent-of-sales basis, NPTN’s free cash flow was -0% while PIR converted 3.18% of its revenues into cash flow. This means that, for a given level of sales, PIR is able to generate more free cash flow for investors.Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. NPTN has a current ratio of 1.80 compared to 2.30 for PIR. This means that PIR can more easily cover its most immediate liabilities over the next twelve months. NPTN’s debt-to-equity ratio is 0.47 versus a D/E of 0.72 for PIR. PIR is therefore the more solvent of the two companies, and has lower financial risk.Valuation
NPTN trades at a P/B of 1.56, and a P/S of 0.98, compared to a forward P/E of 90.00, a P/B of 0.65, and a P/S of 0.11 for PIR. NPTN is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B 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
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. NPTN is currently priced at a -27.5% to its one-year price target of 8.91. Comparatively, PIR is -16.36% relative to its price target of 2.69. This suggests that NPTN is the better investment over the next year.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. NPTN has a beta of 0.92 and PIR’s beta is 1.47. NPTN’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. NPTN has a short ratio of 8.58 compared to a short interest of 6.91 for PIR. This implies that the market is currently less bearish on the outlook for PIR.Summary
Pier 1 Imports, Inc. (NYSE:PIR) beats NeoPhotonics Corporation (NYSE:NPTN) on a total of 8 of the 14 factors compared between the two stocks. PIR 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, PIR is the cheaper of the two stocks on book value and sales basis, Finally, PIR has better sentiment signals based on short interest.