Global

Dissecting the Numbers for International Paper Company (IP) and AutoNation, Inc. (AN)

International Paper Company (NYSE:IP) shares are down more than -1.28% this year and recently decreased -2.49% or -$1.46 to settle at $57.20. AutoNation, Inc. (NYSE:AN), on the other hand, is down -5.59% year to date as of 06/13/2018. It currently trades at $48.46 and has returned -0.92% during the past week.

International Paper Company (NYSE:IP) and AutoNation, Inc. (NYSE:AN) are the two most active stocks in the Packaging & Containers 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 grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect IP to grow earnings at a 13.10% annual rate over the next 5 years. Comparatively, AN is expected to grow at a 8.00% annual rate. All else equal, IP’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 3.38% for AutoNation, Inc. (AN). IP’s ROI is 7.30% while AN has a ROI of 8.90%. The interpretation is that AN’s business generates a higher return on investment than IP’s.

Cash Flow



The value of a stock is simply the present value of its future free cash flows. IP’s free cash flow (“FCF”) per share for the trailing twelve months was -0.05. Comparatively, AN’s free cash flow per share was +1.05. On a percent-of-sales basis, IP’s free cash flow was -0.1% while AN converted 0.44% of its revenues into cash flow. This means that, for a given level of sales, AN 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. IP has a current ratio of 1.60 compared to 0.90 for AN. This means that IP can more easily cover its most immediate liabilities over the next twelve months. IP’s debt-to-equity ratio is 1.57 versus a D/E of 1.68 for AN. AN is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

IP trades at a forward P/E of 10.27, a P/B of 3.26, and a P/S of 1.07, compared to a forward P/E of 9.56, a P/B of 1.81, and a P/S of 0.20 for AN. IP 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 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. IP is currently priced at a -14.84% to its one-year price target of 67.17. Comparatively, AN is -12.59% relative to its price target of 55.44. This suggests that IP 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. IP has a beta of 1.54 and AN’s beta is 1.39. AN’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. IP has a short ratio of 2.85 compared to a short interest of 8.06 for AN. This implies that the market is currently less bearish on the outlook for IP.

Summary

AutoNation, Inc. (NYSE:AN) beats International Paper Company (NYSE:IP) on a total of 7 of the 14 factors compared between the two stocks. AN is growing fastly, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, AN is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, IVZ has better sentiment signals based on short interest.

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