Earnings

The Gap, Inc. (GPS) is better stock pick than Best Buy Co., Inc. (BBY)

The shares of The Gap, Inc. have decreased by more than -8.72% this year alone. The shares recently went down by -0.29% or -$0.09 and now trades at $31.09. The shares of Best Buy Co., Inc. (NYSE:BBY), has jumped by 4.51% year to date as of 06/06/2018. The shares currently trade at $71.56 and have been able to report a change of 2.82% over the past one week.

The stock of The Gap, Inc. and Best Buy Co., Inc. were two of the most active stocks on Wednesday. Investors seem to be very interested in what happens to the stocks of these two companies but do investors favor one over the other? We will analyze the growth, profitability, risk, valuation, and insider trends of both companies and see which one investors prefer.

Next 5Y EPS Growth: 10.71% versus 13.63%

When a company is able to grow consistently in terms of earnings at a high compound rate have the highest likelihood of creating value for its shareholders over time. Analysts have predicted that GPS will grow it’s earning at a 10.71% annual rate in the next 5 years. This is in contrast to BBY which will have a positive growth at a 13.63% annual rate. This means that the higher growth rate of BBY implies a greater potential for capital appreciation over the years.

Profitability and Returns

Growth alone cannot be used to see if the company will be valuable. Shareholders will be the losers if a company invest in ventures that aren’t profitable enough to support upbeat growth. In order for us to accurately measure profitability and return, we will be using the EBITDA margin and Return on Investment (ROI), which balances the difference in capital structure. GPS has an EBITDA margin of 12.58%, this implies that the underlying business of GPS is more profitable. The ROI of GPS is 21.30% while that of BBY is 26.30%. These figures suggest that BBY ventures generate a higher ROI than that of GPS.

Cash Flow



The value of a stock is ultimately determined by the amount of cash flow that the investors have available. Over the last 12 months, GPS’s free cash flow per share is a negative -1.86, while that of BBY is also a negative -0.24.

Liquidity and Financial Risk

The ability of a company to meet up with its short-term obligations and be able to clear its longer-term debts is measured using Liquidity and leverage ratios. The current ratio for GPS is 1.90 and that of BBY is 1.30. This implies that it is easier for GPS to cover its immediate obligations over the next 12 months than BBY. The debt ratio of GPS is 0.40 compared to 0.38 for BBY. GPS can be able to settle its long-term debts and thus is a lower financial risk than BBY.

Valuation

GPS currently trades at a forward P/E of 11.50, a P/B of 3.83, and a P/S of 0.72 while BBY trades at a forward P/E of 13.31, a P/B of 5.73, and a P/S of 0.47. This means that looking at the earnings, book values and sales basis, GPS is the cheaper one. It is very obvious that earnings are the most important factors to investors, thus analysts are most likely to place their bet on the P/E.

Analyst Price Targets and Opinions




The mistake some people make is that they think a cheap stock has more value to it. In order to know the value of a stock, there is need to compare its current price to its likely trading price in the future. The price of GPS is currently at a -8.61% to its one-year price target of 34.02. Looking at its rival pricing, BBY is at a -5.82% relative to its price target of 75.98.

When looking at the investment recommendation on say a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell), GPS is given a 3.00 while 2.90 placed for BBY. This means that analysts are more bullish on the outlook for GPS stocks.

Insider Activity and Investor Sentiment

Short interest or otherwise called the percentage of a stock’s tradable shares currently being shorted is another data that investors use to get a handle on sentiment. The short ratio for GPS is 6.09 while that of BBY is just 6.70. This means that analysts are more bullish on the forecast for GPS stock.

Conclusion

The stock of The Gap, Inc. defeats that of Best Buy Co., Inc. when the two are compared, with GPS taking 7 out of the total factors that were been considered. GPS happens to be more profitable, generates a higher ROI, has higher cash flow per share, higher liquidity and has a lower financial risk. When looking at the stock valuation, GPS is the cheaper one on an earnings, book value and sales basis. Finally, the sentiment signal for GPS is better on when it is viewed on short interest.

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