Calgon Carbon Corporation (NYSE:CCC) and Energy Recovery, Inc. (NASDAQ:ERII) are the two most active stocks in the Pollution & Treatment Controls 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.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect CCC to grow earnings at a 7.00% annual rate over the next 5 years. Comparatively, ERII is expected to grow at a 20.00% annual rate. All else equal, ERII’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. Calgon Carbon Corporation (CCC) has an EBITDA margin of 11.25%, compared to an EBITDA margin of 9.46% for Energy Recovery, Inc. (ERII). This suggests that CCC underlying business is more profitable. CCC’s ROI is 3.00% while ERII has a ROI of 1.10%. The interpretation is that CCC’s business generates a higher return on investment than ERII’s.
The value of a stock is simply the present value of its future free cash flows. CCC’s free cash flow (“FCF”) per share for the trailing twelve months was -0.30. Comparatively, ERII’s free cash flow per share was -0.08. On a percent-of-sales basis, CCC’s free cash flow was -0% while ERII converted -0.01% of its revenues into cash flow. This means that, for a given level of sales, CCC 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. CCC has a current ratio of 2.90 compared to 7.40 for ERII. This means that ERII can more easily cover its most immediate liabilities over the next twelve months. CCC’s debt-to-equity ratio is 0.62 versus a D/E of 0.00 for ERII. CCC is therefore the more solvent of the two companies, and has lower financial risk.
CCC trades at a forward P/E of 18.03, a P/B of 1.76, and a P/S of 1.25, compared to a forward P/E of 22.38, a P/B of 5.08, and a P/S of 5.91 for ERII. CCC 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
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”. CCC is currently priced at a -19.48% to its one-year price target of $17.20. Comparatively, ERII is -66.49% relative to its price target of $18.50. This suggests that ERII is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.20 for CCC and 1.30 for ERII, which implies that analysts are more bullish on the outlook for CCC.
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. CCC has a beta of 1.18 and ERII’s beta is 5.59. CCC’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. CCC has a short ratio of 3.63 compared to a short interest of 17.70 for ERII. This implies that the market is currently less bearish on the outlook for CCC.
Calgon Carbon Corporation (NYSE:CCC) beats Energy Recovery, Inc. (NASDAQ:ERII) on a total of 8 of the 14 factors compared between the two stocks. CCC is more profitable, generates a higher return on investment and has a higher cash conversion rate. In terms of valuation, CCC is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, CCC has better sentiment signals based on short interest.