Global

A Side-by-side Analysis of Affiliated Managers Group, Inc. (AMG) and Colfax Corporation (CFX)

Affiliated Managers Group, Inc. (NYSE:AMG) shares are down more than -24.00% this year and recently decreased -3.81% or -$6.18 to settle at $156.00. Colfax Corporation (NYSE:CFX), on the other hand, is down -22.51% year to date as of 06/13/2018. It currently trades at $30.70 and has returned -1.73% during the past week.

Affiliated Managers Group, Inc. (NYSE:AMG) and Colfax Corporation (NYSE:CFX) are the two most active stocks in the Asset Management 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

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect AMG to grow earnings at a 10.81% annual rate over the next 5 years. Comparatively, CFX is expected to grow at a 10.25% annual rate. All else equal, AMG’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. EBITDA margin of 8.42% for Colfax Corporation (CFX). AMG’s ROI is 9.30% while CFX has a ROI of -0.40%. The interpretation is that AMG’s business generates a higher return on investment than CFX’s.

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. AMG’s free cash flow (“FCF”) per share for the trailing twelve months was +3.17. Comparatively, CFX’s free cash flow per share was -0.11. On a percent-of-sales basis, AMG’s free cash flow was 7.47% while CFX converted -0.41% of its revenues into cash flow. This means that, for a given level of sales, AMG is able to generate more free cash flow for investors.

Liquidity and Financial Risk

AMG’s debt-to-equity ratio is 0.51 versus a D/E of 0.31 for CFX. AMG is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

AMG trades at a forward P/E of 8.51, a P/B of 2.32, and a P/S of 3.61, compared to a forward P/E of 13.22, a P/B of 1.05, and a P/S of 1.09 for CFX. AMG 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

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. AMG is currently priced at a -25.23% to its one-year price target of 208.63. Comparatively, CFX is -12.51% relative to its price target of 35.09. This suggests that AMG is the better investment over the next year.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. AMG has a beta of 1.53 and CFX’s beta is 1.29. CFX’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. AMG has a short ratio of 2.10 compared to a short interest of 4.76 for CFX. This implies that the market is currently less bearish on the outlook for AMG.

Summary




Affiliated Managers Group, Inc. (NYSE:AMG) beats Colfax Corporation (NYSE:CFX) on a total of 8 of the 14 factors compared between the two stocks. AMG is growing fastly, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. AMG is more undervalued relative to its price target. Finally, AMG has better sentiment signals based on short interest.

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