Global Brass and Copper Holdings, Inc. (NYSE:BRSS) and Haynes International, Inc. (NASDAQ:HAYN) are the two most active stocks in the Metal Fabrication 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect BRSS to grow earnings at a 10.00% annual rate over the next 5 years. Comparatively, HAYN is expected to grow at a 15.00% annual rate. All else equal, HAYN’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. Global Brass and Copper Holdings, Inc. (BRSS) has an EBITDA margin of 7.05%, compared to an EBITDA margin of 3.07% for Haynes International, Inc. (HAYN). This suggests that BRSS underlying business is more profitable. BRSS’s ROI is 14.50% while HAYN has a ROI of 1.70%. The interpretation is that BRSS’s business generates a higher return on investment than HAYN’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. BRSS’s free cash flow (“FCF”) per share for the trailing twelve months was +0.84. Comparatively, HAYN’s free cash flow per share was -0.55. On a percent-of-sales basis, BRSS’s free cash flow was 1.37% while HAYN converted -0% of its revenues into cash flow. This means that, for a given level of sales, BRSS is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. BRSS has a current ratio of 2.80 compared to 6.20 for HAYN. This means that HAYN can more easily cover its most immediate liabilities over the next twelve months. BRSS’s debt-to-equity ratio is 2.55 versus a D/E of 0.03 for HAYN. BRSS is therefore the more solvent of the two companies, and has lower financial risk.
BRSS trades at a forward P/E of 10.18, a P/B of 4.99, and a P/S of 0.43, compared to a forward P/E of 21.71, a P/B of 1.20, and a P/S of 0.93 for HAYN. 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. BRSS is currently priced at a -35.91% to its one-year price target of $44.00. Comparatively, HAYN is -34.16% relative to its price target of $45.00. This suggests that BRSS 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 2.70 for BRSS and 2.30 for HAYN, which implies that analysts are more bullish on the outlook for BRSS.
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. BRSS has a beta of 0.50 and HAYN’s beta is 1.51. BRSS’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. BRSS has a short ratio of 1.49 compared to a short interest of 4.84 for HAYN. This implies that the market is currently less bearish on the outlook for BRSS.
Global Brass and Copper Holdings, Inc. (NYSE:BRSS) beats Haynes International, Inc. (NASDAQ:HAYN) on a total of 9 of the 14 factors compared between the two stocks. BRSS is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, BRSS is the cheaper of the two stocks on an earnings and sales basis, BRSS is more undervalued relative to its price target. Finally, BRSS has better sentiment signals based on short interest.