Terex Corporation (NYSE:TEX) shares are down more than -13.44% this year and recently decreased -1.30% or -$0.55 to settle at $41.74. First Republic Bank (NYSE:FRC), on the other hand, is up 15.44% year to date as of 06/13/2018. It currently trades at $100.02 and has returned -2.25% during the past week.
Terex Corporation (NYSE:TEX) and First Republic Bank (NYSE:FRC) are the two most active stocks in the Farm & Construction 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
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect TEX to grow earnings at a 46.45% annual rate over the next 5 years. Comparatively, FRC is expected to grow at a 12.70% annual rate. All else equal, TEX’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Terex Corporation (TEX) has an EBITDA margin of 6.97%. This suggests that TEX underlying business is more profitable TEX’s ROI is 5.40% while FRC has a ROI of 23.30%. The interpretation is that FRC’s business generates a higher return on investment than TEX’s.Cash Flow
The value of a stock is simply the present value of its future free cash flows. TEX’s free cash flow (“FCF”) per share for the trailing twelve months was -1.07. Comparatively, FRC’s free cash flow per share was +1.22. On a percent-of-sales basis, TEX’s free cash flow was -1.86% while FRC converted 6.61% of its revenues into cash flow. This means that, for a given level of sales, FRC is able to generate more free cash flow for investors.Liquidity and Financial Risk
TEX’s debt-to-equity ratio is 1.00 versus a D/E of 0.24 for FRC. TEX is therefore the more solvent of the two companies, and has lower financial risk.
TEX trades at a forward P/E of 11.42, a P/B of 3.08, and a P/S of 0.67, compared to a forward P/E of 18.09, a P/B of 2.31, and a P/S of 6.19 for FRC. 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”. TEX is currently priced at a -7.84% to its one-year price target of 45.29. Comparatively, FRC is 0.22% relative to its price target of 99.80. This suggests that TEX 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. TEX has a beta of 1.68 and FRC’s beta is 0.87. FRC’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. TEX has a short ratio of 6.09 compared to a short interest of 4.61 for FRC. This implies that the market is currently less bearish on the outlook for FRC.Summary
First Republic Bank (NYSE:FRC) beats Terex Corporation (NYSE:TEX) on a total of 7 of the 14 factors compared between the two stocks. FRC is growing fastly, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. Finally, FRC has better sentiment signals based on short interest.