Global

Dissecting the Numbers for DowDuPont Inc. (DWDP) and Philip Morris International Inc. (PM)

DowDuPont Inc. (NYSE:DWDP) shares are down more than -4.30% this year and recently increased 0.19% or $0.13 to settle at $68.16. Philip Morris International Inc. (NYSE:PM), on the other hand, is down -23.29% year to date as of 05/17/2018. It currently trades at $81.04 and has returned -2.36% during the past week.

DowDuPont Inc. (NYSE:DWDP) and Philip Morris International Inc. (NYSE:PM) are the two most active stocks in the Chemicals – Major Diversified 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 DWDP to grow earnings at a 7.50% annual rate over the next 5 years. Comparatively, PM is expected to grow at a 8.62% annual rate. All else equal, PM’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 15.56% for Philip Morris International Inc. (PM). DWDP’s ROI is 0.70% while PM has a ROI of 39.50%. The interpretation is that PM’s business generates a higher return on investment than DWDP’s.

Cash Flow



The value of a stock is simply the present value of its future free cash flows. DWDP’s free cash flow (“FCF”) per share for the trailing twelve months was -1.62. Comparatively, PM’s free cash flow per share was -0.41. On a percent-of-sales basis, DWDP’s free cash flow was -6.04% while PM converted -0.82% of its revenues into cash flow. This means that, for a given level of sales, PM is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. DWDP has a current ratio of 1.90 compared to 1.20 for PM. This means that DWDP can more easily cover its most immediate liabilities over the next twelve months.

Valuation

DWDP trades at a forward P/E of 13.88, a P/B of 1.56, and a P/S of 2.23, compared to a forward P/E of 14.10, and a P/S of 4.30 for PM. 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. DWDP is currently priced at a -16.67% to its one-year price target of 81.80. Comparatively, PM is -24% relative to its price target of 106.63. This suggests that PM 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. DWDP has a short ratio of 2.04 compared to a short interest of 1.63 for PM. This implies that the market is currently less bearish on the outlook for PM.

Summary




Philip Morris International Inc. (NYSE:PM) beats DowDuPont Inc. (NYSE:DWDP) on a total of 9 of the 14 factors compared between the two stocks. PM 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. PM is more undervalued relative to its price target. Finally, PM has better sentiment signals based on short interest.

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