Earnings

A Side-by-side Analysis of Envision Healthcare Corporation (EVHC) and Brookdale Senior Living Inc. (BKD)

Envision Healthcare Corporation (NYSE:EVHC) shares are down more than -47.64% this year and recently decreased -2.13% or -$0.72 to settle at $33.14. Brookdale Senior Living Inc. (NYSE:BKD), on the other hand, is down -22.30% year to date as of 12/18/2017. It currently trades at $9.65 and has returned -3.02% during the past week.

Envision Healthcare Corporation (NYSE:EVHC) and Brookdale Senior Living Inc. (NYSE:BKD) are the two most active stocks in the Long-Term Care Facilities 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.

Growth

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 EVHC to grow earnings at a 8.17% annual rate over the next 5 years. Comparatively, BKD is expected to grow at a 10.00% annual rate. All else equal, BKD’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. Envision Healthcare Corporation (EVHC) has an EBITDA margin of 9.3%. This suggests that EVHC underlying business is more profitable EVHC’s ROI is 2.80% while BKD has a ROI of -0.60%. The interpretation is that EVHC’s business generates a higher return on investment than BKD’s.

Cash Flow 




If there’s one thing investors care more about than earnings, it’s cash flow. EVHC’s free cash flow (“FCF”) per share for the trailing twelve months was +0.48. Comparatively, BKD’s free cash flow per share was +0.19. On a percent-of-sales basis, EVHC’s free cash flow was 1.57% while BKD converted 0.71% of its revenues into cash flow. This means that, for a given level of sales, EVHC 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. EVHC has a current ratio of 3.00 compared to 0.80 for BKD. This means that EVHC can more easily cover its most immediate liabilities over the next twelve months. EVHC’s debt-to-equity ratio is 0.99 versus a D/E of 3.65 for BKD. BKD is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

EVHC trades at a forward P/E of 10.69, a P/B of 0.62, and a P/S of 0.55, compared to a P/B of 1.19, and a P/S of 0.38 for BKD. EVHC 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 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. EVHC is currently priced at a -18.97% to its one-year price target of 40.90. Comparatively, BKD is -30.22% relative to its price target of 13.83. This suggests that BKD 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 1.60 for EVHC and 1.80 for BKD, which implies that analysts are more bullish on the outlook for BKD.

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. EVHC has a beta of 0.57 and BKD’s beta is 1.75. EVHC’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. EVHC has a short ratio of 5.08 compared to a short interest of 4.07 for BKD. This implies that the market is currently less bearish on the outlook for BKD.

Summary

Envision Healthcare Corporation (NYSE:EVHC) beats Brookdale Senior Living Inc. (NYSE:BKD) on a total of 9 of the 14 factors compared between the two stocks. EVHC 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, DAL has better sentiment signals based on short interest.

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