Earnings

Which Market Offer More Value? – Electronic Arts Inc. (EA), Targa Resources Corp. (TRGP)

The shares of Electronic Arts Inc. have increased by more than 30.34% this year alone. The shares recently went down by -0.01% or -$0.02 and now trades at $136.94. The shares of Targa Resources Corp. (NYSE:TRGP), has jumped by 0.72% year to date as of 06/06/2018. The shares currently trade at $48.77 and have been able to report a change of 0.87% over the past one week.

The stock of Electronic Arts Inc. and Targa Resources Corp. 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: 15.44% versus 10.90%

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 EA will grow it’s earning at a 15.44% annual rate in the next 5 years. This is in contrast to TRGP which will have a positive growth at a 10.90% annual rate. This means that the higher growth rate of EA 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. EA has an EBITDA margin of 30.78%, this implies that the underlying business of EA is more profitable. The ROI of EA is 22.60% while that of TRGP is -0.10%. These figures suggest that EA ventures generate a higher ROI than that of TRGP.

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, EA’s free cash flow per share is a positive 11.38, while that of TRGP is negative -5.29.

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 EA is 2.40 and that of TRGP is 0.80. This implies that it is easier for EA to cover its immediate obligations over the next 12 months than TRGP. The debt ratio of EA is 0.00 compared to 0.88 for TRGP. TRGP can be able to settle its long-term debts and thus is a lower financial risk than EA.

Valuation

EA currently trades at a forward P/E of 24.11, a P/B of 9.09, and a P/S of 8.11 while TRGP trades at a forward P/E of 88.83, a P/B of 1.75, and a P/S of 1.16. This means that looking at the earnings, book values and sales basis, EA 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 EA is currently at a -4.4% to its one-year price target of 143.24. Looking at its rival pricing, TRGP is at a -9.1% relative to its price target of 53.65.

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), EA is given a 1.90 while 2.10 placed for TRGP. This means that analysts are more bullish on the outlook for TRGP 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 EA is 2.43 while that of TRGP is just 5.39. This means that analysts are more bullish on the forecast for EA stock.

Conclusion

The stock of Targa Resources Corp. defeats that of Electronic Arts Inc. when the two are compared, with TRGP taking 3 out of the total factors that were been considered. TRGP 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, TRGP is the cheaper one on an earnings, book value and sales basis. Finally, the sentiment signal for TRGP is better on when it is viewed on short interest.

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