PACCAR Inc (NASDAQ:PCAR) shares are down more than -9.95% this year and recently decreased -1.83% or -$1.19 to settle at $64.01. The Toro Company (NYSE:TTC), on the other hand, is down -4.26% year to date as of 06/13/2018. It currently trades at $62.45 and has returned 4.38% during the past week.
PACCAR Inc (NASDAQ:PCAR) and The Toro Company (NYSE:TTC) are the two most active stocks in the Trucks & Other Vehicles 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
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect PCAR to grow earnings at a 5.04% annual rate over the next 5 years. Comparatively, TTC is expected to grow at a 19.50% annual rate. All else equal, TTC’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 16.54% for The Toro Company (TTC). PCAR’s ROI is 9.00% while TTC has a ROI of 28.40%. The interpretation is that TTC’s business generates a higher return on investment than PCAR’s.Cash Flow
The amount of free cash flow available to investors is ultimately what determines the value of a stock. On a percent-of-sales basis, PCAR’s free cash flow was 0% while TTC converted 3.28% of its revenues into cash flow. This means that, for a given level of sales, TTC 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. PCAR has a current ratio of 4.70 compared to 1.50 for TTC. This means that PCAR can more easily cover its most immediate liabilities over the next twelve months. PCAR’s debt-to-equity ratio is 1.07 versus a D/E of 0.50 for TTC. PCAR is therefore the more solvent of the two companies, and has lower financial risk.Valuation
PCAR trades at a forward P/E of 11.10, a P/B of 2.63, and a P/S of 1.08, compared to a forward P/E of 20.55, a P/B of 10.66, and a P/S of 2.62 for TTC. PCAR 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. PCAR is currently priced at a -11.23% to its one-year price target of 72.11. Comparatively, TTC is -2.42% relative to its price target of 64.00. This suggests that PCAR is the better investment over the next year.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. PCAR has a beta of 1.23 and TTC’s beta is 0.62. TTC’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. PCAR has a short ratio of 3.85 compared to a short interest of 4.32 for TTC. This implies that the market is currently less bearish on the outlook for PCAR.Summary
PACCAR Inc (NASDAQ:PCAR) beats The Toro Company (NYSE:TTC) on a total of 8 of the 14 factors compared between the two stocks. PCAR is more profitable and higher liquidity. In terms of valuation, PCAR is the cheaper of the two stocks on an earnings, book value and sales basis, PCAR is more undervalued relative to its price target. Finally, PCAR has better sentiment signals based on short interest.