Cypress Semiconductor Corporation (NASDAQ:CY) shares are up more than 51.97% this year and recently increased 1.19% or $0.21 to settle at $17.39. Texas Instruments Incorporated (NASDAQ:TXN), on the other hand, is up 36.08% year to date as of 11/24/2017. It currently trades at $99.30 and has returned 1.00% during the past week.
Cypress Semiconductor Corporation (NASDAQ:CY) and Texas Instruments Incorporated (NASDAQ:TXN) are the two most active stocks in the Semiconductor – Broad Line 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 CY to grow earnings at a 45.50% annual rate over the next 5 years. Comparatively, TXN is expected to grow at a 10.82% annual rate. All else equal, CY’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 49.21% for Texas Instruments Incorporated (TXN). CY’s ROI is -19.70% while TXN has a ROI of 24.60%. The interpretation is that TXN’s business generates a higher return on investment than CY’s.
Cash is king when it comes to investing. CY’s free cash flow (“FCF”) per share for the trailing twelve months was +0.25. Comparatively, TXN’s free cash flow per share was +1.03. On a percent-of-sales basis, CY’s free cash flow was 4.34% while TXN converted 7.59% of its revenues into cash flow. This means that, for a given level of sales, TXN 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. CY has a current ratio of 1.40 compared to 3.90 for TXN. This means that TXN can more easily cover its most immediate liabilities over the next twelve months. CY’s debt-to-equity ratio is 0.61 versus a D/E of 0.33 for TXN. CY is therefore the more solvent of the two companies, and has lower financial risk.
CY trades at a forward P/E of 14.57, a P/B of 3.13, and a P/S of 2.54, compared to a forward P/E of 21.85, a P/B of 8.93, and a P/S of 6.71 for TXN. CY is the cheaper of the two stocks on an earnings, book value and sales basis. 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. CY is currently priced at a -4.71% to its one-year price target of 18.25. Comparatively, TXN is -0.17% relative to its price target of 99.47. This suggests that CY 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 CY and 2.40 for TXN, which implies that analysts are equally bullish on their outlook for the two stocks.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. CY has a beta of 2.03 and TXN’s beta is 1.27. TXN’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.CY has a short ratio of 5.48 compared to a short interest of 2.43 for TXN. This implies that the market is currently less bearish on the outlook for TXN.
Texas Instruments Incorporated (NASDAQ:TXN) beats Cypress Semiconductor Corporation (NASDAQ:CY) on a total of 8 of the 14 factors compared between the two stocks. TXN is growing fastly, 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. In terms of valuation, CY is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, TXN has better sentiment signals based on short interest.