Global

Should You Buy Valeant Pharmaceuticals International, Inc. (VRX) or Triumph Group, Inc. (TGI)?

Valeant Pharmaceuticals International, Inc. (NYSE:VRX) shares are up more than 6.26% this year and recently increased 2.41% or $0.52 to settle at $22.08. Triumph Group, Inc. (NYSE:TGI), on the other hand, is down -14.34% year to date as of 05/16/2018. It currently trades at $23.30 and has returned -5.48% during the past week.

Valeant Pharmaceuticals International, Inc. (NYSE:VRX) and Triumph Group, Inc. (NYSE:TGI) are the two most active stocks in the Drug Delivery industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect VRX to grow earnings at a -0.11% annual rate over the next 5 years. Comparatively, TGI is expected to grow at a -12.76% annual rate. All else equal, VRX’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. Valeant Pharmaceuticals International, Inc. (VRX) has an EBITDA margin of 8.63%. This suggests that VRX underlying business is more profitable VRX’s ROI is 9.80% while TGI has a ROI of 1.80%. The interpretation is that VRX’s business generates a higher return on investment than TGI’s.

Cash Flow



The value of a stock is simply the present value of its future free cash flows. VRX’s free cash flow (“FCF”) per share for the trailing twelve months was +1.10. Comparatively, TGI’s free cash flow per share was -. On a percent-of-sales basis, VRX’s free cash flow was 4.4% while TGI converted 0% of its revenues into cash flow. This means that, for a given level of sales, VRX 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. VRX has a current ratio of 1.20 compared to 1.80 for TGI. This means that TGI can more easily cover its most immediate liabilities over the next twelve months. VRX’s debt-to-equity ratio is 5.89 versus a D/E of 1.84 for TGI. VRX is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

VRX trades at a forward P/E of 6.30, a P/B of 1.75, and a P/S of 0.90, compared to a forward P/E of 9.43, a P/B of 1.54, and a P/S of 0.39 for TGI. VRX 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

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. VRX is currently priced at a 28.82% to its one-year price target of 17.14. Comparatively, TGI is -24.64% relative to its price target of 30.92. This suggests that TGI 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. VRX has a beta of -0.37 and TGI’s beta is 1.65. VRX’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. VRX has a short ratio of 2.15 compared to a short interest of 15.85 for TGI. This implies that the market is currently less bearish on the outlook for VRX.

Summary

Valeant Pharmaceuticals International, Inc. (NYSE:VRX) beats Triumph Group, Inc. (NYSE:TGI) on a total of 8 of the 14 factors compared between the two stocks. VRX is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. Finally, VRX has better sentiment signals based on short interest.

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