Graphic Packaging Holding Company (NYSE:GPK) shares are up more than 24.52% this year and recently increased 1.90% or $0.29 to settle at $15.54. Owens-Illinois, Inc. (NYSE:OI), on the other hand, is up 34.23% year to date as of 11/13/2017. It currently trades at $23.37 and has returned -3.99% during the past week.
Graphic Packaging Holding Company (NYSE:GPK) and Owens-Illinois, Inc. (NYSE:OI) are the two most active stocks in the Packaging & Containers industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
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 GPK to grow earnings at a 25.00% annual rate over the next 5 years. Comparatively, OI is expected to grow at a 9.17% annual rate. All else equal, GPK’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., compared to an EBITDA margin of 14.99% for Owens-Illinois, Inc. (OI). GPK’s ROI is 9.40% while OI has a ROI of 4.20%. The interpretation is that GPK’s business generates a higher return on investment than OI’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. GPK’s free cash flow (“FCF”) per share for the trailing twelve months was +0.21. Comparatively, OI’s free cash flow per share was +0.53. On a percent-of-sales basis, GPK’s free cash flow was 1.51% while OI converted 1.29% of its revenues into cash flow. This means that, for a given level of sales, GPK is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. GPK has a current ratio of 1.50 compared to 1.20 for OI. This means that GPK can more easily cover its most immediate liabilities over the next twelve months. GPK’s debt-to-equity ratio is 2.01 versus a D/E of 6.84 for OI. OI is therefore the more solvent of the two companies, and has lower financial risk.
GPK trades at a forward P/E of 18.48, a P/B of 4.26, and a P/S of 1.12, compared to a forward P/E of 8.28, a P/B of 4.63, and a P/S of 0.56 for OI. GPK 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
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. GPK is currently priced at a -7.11% to its one-year price target of 16.73. Comparatively, OI is -12.7% relative to its price target of 26.77. This suggests that OI 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 GPK and 2.70 for OI, which implies that analysts are more bullish on the outlook for OI.
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. GPK has a beta of 1.23 and OI’s beta is 1.53. GPK’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. GPK has a short ratio of 1.62 compared to a short interest of 3.74 for OI. This implies that the market is currently less bearish on the outlook for GPK.
Graphic Packaging Holding Company (NYSE:GPK) beats Owens-Illinois, Inc. (NYSE:OI) on a total of 9 of the 14 factors compared between the two stocks. GPK is growing fastly, generates a higher return on investment, has a higher cash conversion rate, higher liquidity and has lower financial risk. Finally, GPK has better sentiment signals based on short interest.