Fox Factory Holding Corp (NASDAQ:FOXF) and MCBC Holdings, Inc. (NASDAQ:MCFT) are the two most active stocks in the Recreational Vehicles 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.
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 FOXF to grow earnings at a 16.03% annual rate over the next 5 years. Comparatively, MCFT is expected to grow at a 10.00% annual rate. All else equal, FOXF’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. Fox Factory Holding Corp (FOXF) has an EBITDA margin of 15.34%, compared to an EBITDA margin of 15.86% for MCBC Holdings, Inc. (MCFT). This suggests that MCFT underlying business is more profitable. FOXF’s ROI is 15.20% while MCFT has a ROI of 31.30%. The interpretation is that MCFT’s business generates a higher return on investment than FOXF’s.
The value of a stock is simply the present value of its future free cash flows. FOXF’s free cash flow (“FCF”) per share for the trailing twelve months was +0.24. Comparatively, MCFT’s free cash flow per share was +0.41. On a percent-of-sales basis, FOXF’s free cash flow was 0% while MCFT converted 0% of its revenues into cash flow. This means that, for a given level of sales, FOXF is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. FOXF has a current ratio of 2.20 compared to 0.70 for MCFT. This means that FOXF can more easily cover its most immediate liabilities over the next twelve months. FOXF’s debt-to-equity ratio is 0.30 versus a D/E of 8.60 for MCFT. MCFT is therefore the more solvent of the two companies, and has lower financial risk.
FOXF trades at a forward P/E of 21.85, a P/B of 6.37, and a P/S of 3.11, compared to a forward P/E of 12.28, a P/B of 63.39, and a P/S of 1.48 for MCFT. FOXF is the cheaper of the two stocks on book value basis but is expensive in terms of P/E 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. FOXF is currently priced at a -6.28% to its one-year price target of $39.00. Comparatively, MCFT is -11.25% relative to its price target of $20.00. This suggests that MCFT 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 2.60 for FOXF and 1.60 for MCFT, which implies that analysts are more bullish on the outlook for FOXF.
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. FOXF has a beta of 0.71.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. FOXF has a short ratio of 4.16 compared to a short interest of 3.49 for MCFT. This implies that the market is currently less bearish on the outlook for MCFT.
MCBC Holdings, Inc. (NASDAQ:MCFT) beats Fox Factory Holding Corp (NASDAQ:FOXF) on a total of 8 of the 13 factors compared between the two stocks. MCFT is growing fastly, generates a higher return on investment and has higher cash flow per share. In terms of valuation, MCFT is the cheaper of the two stocks on an earnings and sales basis, MCFT is more undervalued relative to its price target. Finally, MCFT has better sentiment signals based on short interest.