Chart Industries, Inc. (NASDAQ:GTLS) and Mueller Industries, Inc. (NYSE:MLI) 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.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect GTLS to grow earnings at a 35.00% annual rate over the next 5 years. Comparatively, MLI is expected to grow at a 12.00% annual rate. All else equal, GTLS’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. Chart Industries, Inc. (GTLS) has an EBITDA margin of 9.48%, compared to an EBITDA margin of 8.96% for Mueller Industries, Inc. (MLI). This suggests that GTLS underlying business is more profitable. GTLS’s ROI is 4.70% while MLI has a ROI of 9.30%. The interpretation is that MLI’s business generates a higher return on investment than GTLS’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. GTLS’s free cash flow (“FCF”) per share for the trailing twelve months was -0.40. Comparatively, MLI’s free cash flow per share was +0.24. On a percent-of-sales basis, GTLS’s free cash flow was -0% while MLI converted 0.67% of its revenues into cash flow. This means that, for a given level of sales, MLI 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. GTLS has a current ratio of 2.60 compared to 3.40 for MLI. This means that MLI can more easily cover its most immediate liabilities over the next twelve months. GTLS’s debt-to-equity ratio is 0.34 versus a D/E of 1.02 for MLI. MLI is therefore the more solvent of the two companies, and has lower financial risk.
GTLS trades at a forward P/E of 24.31, a P/B of 1.44, and a P/S of 1.21, compared to a forward P/B of 3.39, and a P/S of 0.79 for MLI. GTLS 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
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. GTLS is currently priced at a -12.19% to its one-year price target of $38.38. Comparatively, MLI is -13.59% relative to its price target of $34.00. This suggests that MLI 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 GTLS and 3.00 for MLI, which implies that analysts are more bullish on the outlook for MLI.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. GTLS has a beta of 1.24 and MLI’s beta is 1.40. GTLS’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. GTLS has a short ratio of 8.75 compared to a short interest of 2.89 for MLI. This implies that the market is currently less bearish on the outlook for MLI.
Mueller Industries, Inc. (NYSE:MLI) beats Chart Industries, Inc. (NASDAQ:GTLS) on a total of 7 of the 13 factors compared between the two stocks. MLI is growing fastly, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. MLI is more undervalued relative to its price target. Finally, MLI has better sentiment signals based on short interest.