Cree, Inc. (NASDAQ:CREE) shares are up more than 48.28% this year and recently increased 2.87% or $1.09 to settle at $39.13. Brooks Automation, Inc. (NASDAQ:BRKS), on the other hand, is up 46.40% year to date as of 12/15/2017. It currently trades at $24.99 and has returned 2.42% during the past week.
Cree, Inc. (NASDAQ:CREE) and Brooks Automation, Inc. (NASDAQ:BRKS) are the two most active stocks in the Semiconductor Equipment & Materials 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.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect CREE to grow earnings at a 35.90% annual rate over the next 5 years. Comparatively, BRKS is expected to grow at a 12.00% annual rate. All else equal, CREE’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 13.49% for Brooks Automation, Inc. (BRKS). CREE’s ROI is -4.70% while BRKS has a ROI of 8.60%. The interpretation is that BRKS’s business generates a higher return on investment than CREE’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. CREE’s free cash flow (“FCF”) per share for the trailing twelve months was +0.18. Comparatively, BRKS’s free cash flow per share was +0.31. On a percent-of-sales basis, CREE’s free cash flow was 1.2% while BRKS converted 0% of its revenues into cash flow. This means that, for a given level of sales, CREE is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. CREE has a current ratio of 4.80 compared to 2.40 for BRKS. This means that CREE can more easily cover its most immediate liabilities over the next twelve months. CREE’s debt-to-equity ratio is 0.06 versus a D/E of 0.00 for BRKS. CREE is therefore the more solvent of the two companies, and has lower financial risk.
CREE trades at a forward P/E of 79.05, a P/B of 1.73, and a P/S of 2.62, compared to a forward P/E of 15.28, a P/B of 2.87, and a P/S of 2.52 for BRKS. CREE 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. CREE is currently priced at a 24.7% to its one-year price target of 31.38. Comparatively, BRKS is -24.27% relative to its price target of 33.00. This suggests that BRKS 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 3.10 for CREE and 1.80 for BRKS, which implies that analysts are more bullish on the outlook for CREE.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. CREE has a beta of 1.25 and BRKS’s beta is 0.95. BRKS’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. CREE has a short ratio of 6.52 compared to a short interest of 1.84 for BRKS. This implies that the market is currently less bearish on the outlook for BRKS.
Brooks Automation, Inc. (NASDAQ:BRKS) beats Cree, Inc. (NASDAQ:CREE) on a total of 10 of the 14 factors compared between the two stocks. BRKS is growing fastly, generates a higher return on investment, has higher cash flow per share and has lower financial risk. In terms of valuation, BRKS is the cheaper of the two stocks on an earnings and sales basis, BRKS is more undervalued relative to its price target. Finally, BRKS has better sentiment signals based on short interest.