Cummins Inc. (NYSE:CMI) shares are down more than -19.86% this year and recently decreased -1.41% or -$2.03 to settle at $141.56. Invesco Mortgage Capital Inc. (NYSE:IVR), on the other hand, is down -9.98% year to date as of 06/13/2018. It currently trades at $16.05 and has returned -2.07% during the past week.
Cummins Inc. (NYSE:CMI) and Invesco Mortgage Capital Inc. (NYSE:IVR) are the two most active stocks in the Diversified Machinery 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
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect CMI to grow earnings at a 10.73% annual rate over the next 5 years. Comparatively, IVR is expected to grow at a -1.88% annual rate. All else equal, CMI’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 106.24% for Invesco Mortgage Capital Inc. (IVR). CMI’s ROI is 19.20% while IVR has a ROI of 1.70%. The interpretation is that CMI’s business generates a higher return on investment than IVR’s.Cash Flow
Cash is king when it comes to investing. CMI’s free cash flow (“FCF”) per share for the trailing twelve months was -2.21. Comparatively, IVR’s free cash flow per share was +0.14. On a percent-of-sales basis, CMI’s free cash flow was -1.78% while IVR converted 0% of its revenues into cash flow. This means that, for a given level of sales, IVR is able to generate more free cash flow for investors.Liquidity and Financial Risk
CMI’s debt-to-equity ratio is 0.31 versus a D/E of 8.04 for IVR. IVR is therefore the more solvent of the two companies, and has lower financial risk.
CMI trades at a forward P/E of 10.04, a P/B of 3.16, and a P/S of 1.09, compared to a forward P/E of 9.66, a P/B of 0.93, and a P/S of 3.11 for IVR. CMI is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. CMI is currently priced at a -15.74% to its one-year price target of 168.00. Comparatively, IVR is -5.59% relative to its price target of 17.00. This suggests that CMI is the better investment over the next year.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. CMI has a beta of 1.14 and IVR’s beta is 0.65. IVR’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. CMI has a short ratio of 2.02 compared to a short interest of 4.17 for IVR. This implies that the market is currently less bearish on the outlook for CMI.Summary
Cummins Inc. (NYSE:CMI) beats Invesco Mortgage Capital Inc. (NYSE:IVR) on a total of 7 of the 14 factors compared between the two stocks. CMI is growing fastly, generates a higher return on investment, higher liquidity and has lower financial risk. CMI is more undervalued relative to its price target. Finally, CMI has better sentiment signals based on short interest.