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Choosing Between Hewlett Packard Enterprise Company (HPE) and Johnson Controls International plc (JCI)

Hewlett Packard Enterprise Company (NYSE:HPE) shares are up more than 23.05% this year and recently increased 0.23% or $0.04 to settle at $17.67. Johnson Controls International plc (NYSE:JCI), on the other hand, is down -4.20% year to date as of 05/17/2018. It currently trades at $36.51 and has returned -0.57% during the past week.

Hewlett Packard Enterprise Company (NYSE:HPE) and Johnson Controls International plc (NYSE:JCI) are the two most active stocks in the Communication Equipment 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

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect HPE to grow earnings at a -7.77% annual rate over the next 5 years. Comparatively, JCI is expected to grow at a 10.15% annual rate. All else equal, JCI’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. , compared to an EBITDA margin of 12.96% for Johnson Controls International plc (JCI). HPE’s ROI is 2.10% while JCI has a ROI of 6.90%. The interpretation is that JCI’s business generates a higher return on investment than HPE’s.

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. On a percent-of-sales basis, HPE’s free cash flow was -2.17% while JCI converted 0% of its revenues into cash flow. This means that, for a given level of sales, JCI 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. HPE has a current ratio of 1.10 compared to 1.10 for JCI. This means that HPE can more easily cover its most immediate liabilities over the next twelve months. HPE’s debt-to-equity ratio is 0.58 versus a D/E of 0.58 for JCI. HPE is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

HPE trades at a forward P/E of 11.90, a P/B of 1.17, and a P/S of 0.97, compared to a forward P/E of 11.98, a P/B of 1.62, and a P/S of 1.10 for JCI. HPE is the cheaper 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. HPE is currently priced at a -7.63% to its one-year price target of 19.13. Comparatively, JCI is -10.01% relative to its price target of 40.57. This suggests that JCI is the better investment over the next year.

Insider Activity and Investor Sentiment

Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. HPE has a short ratio of 1.99 compared to a short interest of 4.91 for JCI. This implies that the market is currently less bearish on the outlook for HPE.

Summary




Johnson Controls International plc (NYSE:JCI) beats Hewlett Packard Enterprise Company (NYSE:HPE) on a total of 7 of the 14 factors compared between the two stocks. JCI higher liquidity, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, HPE is the cheaper of the two stocks on an earnings, book value and sales basis, JCI is more undervalued relative to its price target. Finally, VICI has better sentiment signals based on short interest.

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