American Outdoor Brands Corporation (NASDAQ:AOBC) shares are down more than -2.57% this year and recently decreased -1.11% or -$0.14 to settle at $12.51. AvalonBay Communities, Inc. (NYSE:AVB), on the other hand, is down -6.64% year to date as of 06/13/2018. It currently trades at $166.56 and has returned -0.52% during the past week.
American Outdoor Brands Corporation (NASDAQ:AOBC) and AvalonBay Communities, Inc. (NYSE:AVB) are the two most active stocks in the Aerospace/Defense Products & Services industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.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 AOBC to grow earnings at a 15.00% annual rate over the next 5 years. Comparatively, AVB is expected to grow at a 2.54% annual rate. All else equal, AOBC’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., compared to an EBITDA margin of 72.72% for AvalonBay Communities, Inc. (AVB). AOBC’s ROI is 22.30% while AVB has a ROI of 3.20%. The interpretation is that AOBC’s business generates a higher return on investment than AVB’s.Cash Flow
If there’s one thing investors care more about than earnings, it’s cash flow. AOBC’s free cash flow (“FCF”) per share for the trailing twelve months was +0.40. Comparatively, AVB’s free cash flow per share was +0.76. On a percent-of-sales basis, AOBC’s free cash flow was 0% while AVB converted 4.87% of its revenues into cash flow. This means that, for a given level of sales, AVB is able to generate more free cash flow for investors.Liquidity and Financial Risk
AOBC’s debt-to-equity ratio is 0.58 versus a D/E of 0.74 for AVB. AVB is therefore the more solvent of the two companies, and has lower financial risk.
AOBC trades at a forward P/E of 21.38, a P/B of 1.65, and a P/S of 1.00, compared to a forward P/E of 36.45, a P/B of 2.22, and a P/S of 10.45 for AVB. AOBC 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. AOBC is currently priced at a -2.49% to its one-year price target of 12.83. Comparatively, AVB is -10.39% relative to its price target of 185.88. This suggests that AVB is the better investment over the next year.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. AOBC has a beta of 0.04 and AVB’s beta is 0.39. AOBC’s shares are therefore the less volatile of the two stocks.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. AOBC has a short ratio of 4.41 compared to a short interest of 4.37 for AVB. This implies that the market is currently less bearish on the outlook for AVB.Summary
American Outdoor Brands Corporation (NASDAQ:AOBC) beats AvalonBay Communities, Inc. (NYSE:AVB) on a total of 9 of the 14 factors compared between the two stocks. AOBC is growing fastly, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, AOBC is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, GPK has better sentiment signals based on short interest.