KKR & Co. L.P. (NYSE:KKR) and Northern Trust Corporation (NASDAQ:NTRS) are the two most active stocks in the Asset Management 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 grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect KKR to grow earnings at a 57.93% annual rate over the next 5 years. Comparatively, NTRS is expected to grow at a 11.98% annual rate. All else equal, KKR’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. KKR & Co. L.P. (KKR) has an EBITDA margin of 97.85%, compared to an EBITDA margin of 42.42% for Northern Trust Corporation (NTRS). This suggests that KKR underlying business is more profitable. KKR’s ROI is 0.80% while NTRS has a ROI of 0.90%. The interpretation is that NTRS’s business generates a higher return on investment than KKR’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. KKR’s free cash flow (“FCF”) per share for the trailing twelve months was -0.06. Comparatively, NTRS’s free cash flow per share was -2.63. On a percent-of-sales basis, KKR’s free cash flow was -1.48% while NTRS converted -11.68% of its revenues into cash flow. This means that, for a given level of sales, KKR 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. KKR’s debt-to-equity ratio is 3.13 versus a D/E of 12.24 for NTRS. NTRS is therefore the more solvent of the two companies, and has lower financial risk.
KKR trades at a forward P/E of 7.45, a P/B of 1.38, and a P/S of 5.31, compared to a forward P/E of 16.39, a P/B of 2.16, and a P/S of 3.75 for NTRS. 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”. KKR is currently priced at a -20.76% to its one-year price target of $23.17. Comparatively, NTRS is -8.74% relative to its price target of $94.80. This suggests that KKR 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 2.10 for KKR and 2.60 for NTRS, which implies that analysts are more bullish on the outlook for NTRS.
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. KKR has a beta of 1.52 and NTRS’s beta is 0.92. NTRS’s shares are therefore the less volatile of the two stocks.
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. KKR has a short ratio of 2.34 compared to a short interest of 1.69 for NTRS. This implies that the market is currently less bearish on the outlook for NTRS.
KKR & Co. L.P. (NYSE:KKR) beats Northern Trust Corporation (NASDAQ:NTRS) on a total of 9 of the 13 factors compared between the two stocks. KKR is growing fastly, is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, KKR is the cheaper of the two stocks on an earnings and book value, KKR is more undervalued relative to its price target. Finally, BX has better sentiment signals based on short interest.