Target Corporation (NYSE:TGT) shares are up more than 19.57% this year and recently decreased -1.33% or -$1.05 to settle at $78.02. Burlington Stores, Inc. (NYSE:BURL), on the other hand, is up 25.46% year to date as of 06/13/2018. It currently trades at $154.35 and has returned -1.25% during the past week.
Target Corporation (NYSE:TGT) and Burlington Stores, Inc. (NYSE:BURL) are the two most active stocks in the Discount, Variety Stores industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity 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 TGT to grow earnings at a 6.50% annual rate over the next 5 years. Comparatively, BURL is expected to grow at a 25.60% annual rate. All else equal, BURL’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., compared to an EBITDA margin of 11.45% for Burlington Stores, Inc. (BURL). TGT’s ROI is 13.20% while BURL has a ROI of 28.20%. The interpretation is that BURL’s business generates a higher return on investment than TGT’s.Cash Flow
Cash is king when it comes to investing. TGT’s free cash flow (“FCF”) per share for the trailing twelve months was -1.20. Comparatively, BURL’s free cash flow per share was +0.00. On a percent-of-sales basis, TGT’s free cash flow was -0.89% while BURL converted 0% of its revenues into cash flow. This means that, for a given level of sales, BURL is able to generate more free cash flow for investors.Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. TGT has a current ratio of 0.90 compared to 1.00 for BURL. This means that BURL can more easily cover its most immediate liabilities over the next twelve months. TGT’s debt-to-equity ratio is 1.02 versus a D/E of 10.20 for BURL. BURL is therefore the more solvent of the two companies, and has lower financial risk.Valuation
TGT trades at a forward P/E of 14.29, a P/B of 3.75, and a P/S of 0.58, compared to a forward P/E of 22.08, a P/B of 92.98, and a P/S of 1.66 for BURL. TGT is the cheaper 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. TGT is currently priced at a 2.03% to its one-year price target of 76.47. Comparatively, BURL is -3.81% relative to its price target of 160.47. This suggests that BURL 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. TGT has a beta of 0.73 and BURL’s beta is 0.43. BURL’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. TGT has a short ratio of 7.31 compared to a short interest of 3.69 for BURL. This implies that the market is currently less bearish on the outlook for BURL.Summary
Burlington Stores, Inc. (NYSE:BURL) beats Target Corporation (NYSE:TGT) on a total of 10 of the 14 factors compared between the two stocks. BURL has lower financial risk, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, TGT is the cheaper of the two stocks on an earnings, book value and sales basis, BURL is more undervalued relative to its price target. Finally, BURL has better sentiment signals based on short interest.