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Critical Comparison: Allscripts Healthcare Solutions, Inc. (MDRX) vs. Zoe’s Kitchen, Inc. (ZOES)

Allscripts Healthcare Solutions, Inc. (NASDAQ:MDRX) shares are down more than -17.11% this year and recently decreased -3.21% or -$0.4 to settle at $12.06. Zoe’s Kitchen, Inc. (NYSE:ZOES), on the other hand, is down -47.25% year to date as of 06/13/2018. It currently trades at $8.82 and has returned -9.91% during the past week.

Allscripts Healthcare Solutions, Inc. (NASDAQ:MDRX) and Zoe’s Kitchen, Inc. (NYSE:ZOES) are the two most active stocks in the Application Software 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 MDRX to grow earnings at a 18.20% annual rate over the next 5 years. Comparatively, ZOES is expected to grow at a 40.00% annual rate. All else equal, ZOES’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 5.8% for Zoe’s Kitchen, Inc. (ZOES). MDRX’s ROI is -4.00% while ZOES has a ROI of 0.20%. The interpretation is that ZOES’s business generates a higher return on investment than MDRX’s.

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. MDRX’s free cash flow (“FCF”) per share for the trailing twelve months was +0.28. Comparatively, ZOES’s free cash flow per share was -0.13. On a percent-of-sales basis, MDRX’s free cash flow was 2.76% while ZOES converted -0% of its revenues into cash flow. This means that, for a given level of sales, MDRX is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. MDRX has a current ratio of 1.00 compared to 0.60 for ZOES. This means that MDRX can more easily cover its most immediate liabilities over the next twelve months. MDRX’s debt-to-equity ratio is 1.61 versus a D/E of 0.37 for ZOES. MDRX is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

MDRX trades at a forward P/E of 13.67, a P/B of 2.02, and a P/S of 1.14, compared to a P/B of 1.34, and a P/S of 0.56 for ZOES. MDRX is the expensive 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 is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. MDRX is currently priced at a -21.94% to its one-year price target of 15.45. Comparatively, ZOES is -23.77% relative to its price target of 11.57. This suggests that ZOES 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. MDRX has a beta of 1.24 and ZOES’s beta is 0.17. ZOES’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. MDRX has a short ratio of 8.03 compared to a short interest of 9.10 for ZOES. This implies that the market is currently less bearish on the outlook for MDRX.

Summary

Zoe’s Kitchen, Inc. (NYSE:ZOES) beats Allscripts Healthcare Solutions, Inc. (NASDAQ:MDRX) on a total of 9 of the 14 factors compared between the two stocks. ZOES has higher cash flow per share, is more profitable, generates a higher return on investment and has lower financial risk. In terms of valuation, ZOES is the cheaper of the two stocks on an earnings, book value and sales basis, ZOES is more undervalued relative to its price target. Finally, KSS has better sentiment signals based on short interest.

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