Global

Dissecting the Numbers for AbbVie Inc. (ABBV) and Ocwen Financial Corporation (OCN)

AbbVie Inc. (NYSE:ABBV) shares are up more than 0.90% this year and recently decreased -1.34% or -$1.33 to settle at $97.58. Ocwen Financial Corporation (NYSE:OCN), on the other hand, is up 40.58% year to date as of 06/13/2018. It currently trades at $4.40 and has returned -3.51% during the past week.

AbbVie Inc. (NYSE:ABBV) and Ocwen Financial Corporation (NYSE:OCN) are the two most active stocks in the Drug Manufacturers – Major industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider 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 ABBV to grow earnings at a 16.70% annual rate over the next 5 years. Comparatively, OCN is expected to grow at a 3.00% annual rate. All else equal, ABBV’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 24.25% for Ocwen Financial Corporation (OCN). ABBV’s ROI is 25.40% while OCN has a ROI of 4.00%. The interpretation is that ABBV’s business generates a higher return on investment than OCN’s.

Cash Flow



The value of a stock is simply the present value of its future free cash flows. ABBV’s free cash flow (“FCF”) per share for the trailing twelve months was +0.87. Comparatively, OCN’s free cash flow per share was +0.00. On a percent-of-sales basis, ABBV’s free cash flow was 4.89% while OCN converted 0% of its revenues into cash flow. This means that, for a given level of sales, ABBV is able to generate more free cash flow for investors.

Liquidity and Financial Risk

ABBV’s debt-to-equity ratio is 10.49 versus a D/E of 11.46 for OCN. OCN is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

ABBV trades at a forward P/E of 10.95, a P/B of 43.76, and a P/S of 5.24, compared to a P/B of 0.93, and a P/S of 0.53 for OCN. ABBV 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

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. ABBV is currently priced at a -14.3% to its one-year price target of 113.86. Comparatively, OCN is 10% relative to its price target of 4.00. This suggests that ABBV is the better investment over the next year.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. ABBV has a beta of 1.59 and OCN’s beta is 1.16. OCN’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. ABBV has a short ratio of 2.69 compared to a short interest of 6.43 for OCN. This implies that the market is currently less bearish on the outlook for ABBV.

Summary




AbbVie Inc. (NYSE:ABBV) beats Ocwen Financial Corporation (NYSE:OCN) on a total of 10 of the 14 factors compared between the two stocks. ABBV is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. ABBV is more undervalued relative to its price target. Finally, ABBV has better sentiment signals based on short interest.

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