The Procter & Gamble Company (NYSE:PG) shares are up more than 5.85% this year and recently increased 0.95% or $0.84 to settle at $89.00. Colgate-Palmolive Company (NYSE:CL), on the other hand, is up 12.62% year to date as of 11/13/2017. It currently trades at $73.70 and has returned 4.91% during the past week.
The Procter & Gamble Company (NYSE:PG) and Colgate-Palmolive Company (NYSE:CL) 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.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect PG to grow earnings at a 6.60% annual rate over the next 5 years. Comparatively, CL is expected to grow at a 7.55% annual rate. All else equal, CL’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 26.13% for Colgate-Palmolive Company (CL). PG’s ROI is 12.70% while CL has a ROI of 42.70%. The interpretation is that CL’s business generates a higher return on investment than PG’s.
If there’s one thing investors care more about than earnings, it’s cash flow. PG’s free cash flow (“FCF”) per share for the trailing twelve months was +0.25. Comparatively, CL’s free cash flow per share was +0.54. On a percent-of-sales basis, PG’s free cash flow was 0.98% while CL converted 3.12% of its revenues into cash flow. This means that, for a given level of sales, CL 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. PG has a current ratio of 0.90 compared to 1.20 for CL. This means that CL can more easily cover its most immediate liabilities over the next twelve months.
PG trades at a forward P/E of 20.01, a P/B of 4.22, and a P/S of 3.45, compared to a forward P/E of 23.94, and a P/S of 4.22 for CL. 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 is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. PG is currently priced at a -3.6% to its one-year price target of 92.32. Comparatively, CL is -3.17% relative to its price target of 76.11. This suggests that PG 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 2.40 for PG and 2.80 for CL, which implies that analysts are more bullish on the outlook for CL.
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. PG has a beta of 0.65 and CL’s beta is 0.79. PG’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. PG has a short ratio of 3.92 compared to a short interest of 1.74 for CL. This implies that the market is currently less bearish on the outlook for CL.
Colgate-Palmolive Company (NYSE:CL) beats The Procter & Gamble Company (NYSE:PG) on a total of 9 of the 14 factors compared between the two stocks. CL , is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. Finally, CL has better sentiment signals based on short interest.