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Sarepta Therapeutics, Inc. (SRPT) vs. Mohawk Industries, Inc. (MHK): Which is the Better Investment?

Sarepta Therapeutics, Inc. (NASDAQ:SRPT) shares are up more than 73.92% this year and recently decreased -2.01% or -$1.99 to settle at $96.77. Mohawk Industries, Inc. (NYSE:MHK), on the other hand, is down -24.03% year to date as of 06/13/2018. It currently trades at $209.61 and has returned 1.84% during the past week.

Sarepta Therapeutics, Inc. (NASDAQ:SRPT) and Mohawk Industries, Inc. (NYSE:MHK) are the two most active stocks in the Biotechnology industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

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 SRPT to grow earnings at a -0.20% annual rate over the next 5 years. Comparatively, MHK is expected to grow at a 8.40% annual rate. All else equal, MHK’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. EBITDA margin of 18.59% for Mohawk Industries, Inc. (MHK). SRPT’s ROI is -14.20% while MHK has a ROI of 10.80%. The interpretation is that MHK’s business generates a higher return on investment than SRPT’s.

Cash Flow



Earnings don’t always accurately reflect the amount of cash that a company brings in. SRPT’s free cash flow (“FCF”) per share for the trailing twelve months was -0.74. Comparatively, MHK’s free cash flow per share was -0.90. On a percent-of-sales basis, SRPT’s free cash flow was -0.03% while MHK converted -0.71% of its revenues into cash flow. This means that, for a given level of sales, SRPT 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. SRPT has a current ratio of 13.40 compared to 1.50 for MHK. This means that SRPT can more easily cover its most immediate liabilities over the next twelve months. SRPT’s debt-to-equity ratio is 0.55 versus a D/E of 0.40 for MHK. SRPT is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

SRPT trades at a P/B of 8.05, and a P/S of 31.25, compared to a forward P/E of 12.20, a P/B of 2.13, and a P/S of 1.58 for MHK. SRPT is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S ratio. 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. SRPT is currently priced at a -2.89% to its one-year price target of 99.65. Comparatively, MHK is -24.28% relative to its price target of 276.83. This suggests that MHK 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. SRPT has a beta of 1.33 and MHK’s beta is 1.38. SRPT’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. SRPT has a short ratio of 8.95 compared to a short interest of 1.56 for MHK. This implies that the market is currently less bearish on the outlook for MHK.

Summary

Mohawk Industries, Inc. (NYSE:MHK) beats Sarepta Therapeutics, Inc. (NASDAQ:SRPT) on a total of 8 of the 14 factors compared between the two stocks. MHK has higher cash flow per share, is more profitable, generates a higher return on investment and has lower financial risk. In terms of valuation, MHK is the cheaper of the two stocks on book value and sales basis, MHK is more undervalued relative to its price target. Finally, MHK has better sentiment signals based on short interest.

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