Coty Inc. (NYSE:COTY) shares are down more than -8.52% this year and recently increased 2.70% or $0.44 to settle at $16.75. Edgewell Personal Care Company (NYSE:EPC), on the other hand, is down -19.30% year to date as of 11/13/2017. It currently trades at $58.90 and has returned -2.71% during the past week.
Coty Inc. (NYSE:COTY) and Edgewell Personal Care Company (NYSE:EPC) are the two most active stocks in the Personal Products 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 COTY to grow earnings at a 16.83% annual rate over the next 5 years. Comparatively, EPC is expected to grow at a 4.60% annual rate. All else equal, COTY’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., compared to an EBITDA margin of 16.8% for Edgewell Personal Care Company (EPC). COTY’s ROI is -1.10% while EPC has a ROI of 0.20%. The interpretation is that EPC’s business generates a higher return on investment than COTY’s.
Cash is king when it comes to investing. COTY’s free cash flow (“FCF”) per share for the trailing twelve months was -0.29. Comparatively, EPC’s free cash flow per share was +2.70. On a percent-of-sales basis, COTY’s free cash flow was -2.84% while EPC converted 6.51% of its revenues into cash flow. This means that, for a given level of sales, EPC 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. COTY has a current ratio of 1.10 compared to 2.30 for EPC. This means that EPC can more easily cover its most immediate liabilities over the next twelve months. COTY’s debt-to-equity ratio is 0.82 versus a D/E of 0.83 for EPC. EPC is therefore the more solvent of the two companies, and has lower financial risk.
COTY trades at a forward P/E of 17.47, a P/B of 1.33, and a P/S of 1.47, compared to a forward P/E of 14.33, a P/B of 1.76, and a P/S of 1.51 for EPC. 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. COTY is currently priced at a -10.43% to its one-year price target of 18.70. Comparatively, EPC is -25.44% relative to its price target of 79.00. This suggests that EPC 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 COTY and 2.60 for EPC, which implies that analysts are more bullish on the outlook for COTY.
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. COTY has a beta of 0.30 and EPC’s beta is 0.92. COTY’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. COTY has a short ratio of 8.16 compared to a short interest of 11.30 for EPC. This implies that the market is currently less bearish on the outlook for COTY.
Edgewell Personal Care Company (NYSE:EPC) beats Coty Inc. (NYSE:COTY) on a total of 8 of the 14 factors compared between the two stocks. EPC is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. EPC is more undervalued relative to its price target. Finally, CL has better sentiment signals based on short interest.