HP Inc. (NYSE:HPQ) and SBA Communications Corporation (NASDAQ:SBAC) are the two most active stocks in the Diversified Computer Systems 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 HPQ to grow earnings at a 5.54% annual rate over the next 5 years. Comparatively, SBAC is expected to grow at a 46.92% annual rate. All else equal, SBAC’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. HP Inc. (HPQ) has an EBITDA margin of 8.01%, compared to an EBITDA margin of 42.29% for SBA Communications Corporation (SBAC). This suggests that SBAC underlying business is more profitable. HPQ’s ROI is 83.90% while SBAC has a ROI of 4.80%. The interpretation is that HPQ’s business generates a higher return on investment than SBAC’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. On a percent-of-sales basis, HPQ’s free cash flow was 0.31% while SBAC converted 0% of its revenues into cash flow. This means that, for a given level of sales, HPQ 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. HPQ has a current ratio of 1.00 compared to 1.30 for SBAC. This means that SBAC can more easily cover its most immediate liabilities over the next twelve months.
HPQ trades at a forward P/E of 10.63, and a P/S of 0.63, compared to a forward P/E of 92.31, and a P/S of 10.33 for SBAC. 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. HPQ is currently priced at a -13.83% to its one-year price target of $21.48. Comparatively, SBAC is -5.36% relative to its price target of $151.00. This suggests that HPQ 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 2.00 for HPQ and 2.10 for SBAC, which implies that analysts are more bullish on the outlook for SBAC.
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. HPQ has a beta of 1.92 and SBAC’s beta is 0.72. SBAC’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. HPQ has a short ratio of 2.93 compared to a short interest of 2.22 for SBAC. This implies that the market is currently less bearish on the outlook for SBAC.
HP Inc. (NYSE:HPQ) beats SBA Communications Corporation (NASDAQ:SBAC) on a total of 6 of the 11 factors compared between the two stocks. HPQ generates a higher return on investment and has a higher cash conversion rate. In terms of valuation, HPQ is the cheaper of the two stocks on an earnings and sales basis, HPQ is more undervalued relative to its price target. Finally, DLTR has better sentiment signals based on short interest.