Huntsman Corporation (NYSE:HUN) shares are up more than 3.18% this year and recently decreased -0.72% or -$0.25 to settle at $34.35. Praxair, Inc. (NYSE:PX), on the other hand, is up 3.42% year to date as of 01/04/2018. It currently trades at $159.97 and has returned 3.75% during the past week.
Huntsman Corporation (NYSE:HUN) and Praxair, Inc. (NYSE:PX) are the two most active stocks in the Chemicals – Major Diversified 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.
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 HUN to grow earnings at a 8.00% annual rate over the next 5 years. Comparatively, PX is expected to grow at a 8.47% annual rate. All else equal, PX’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. , compared to an EBITDA margin of 32.9% for Praxair, Inc. (PX). HUN’s ROI is 10.20% while PX has a ROI of 11.60%. The interpretation is that PX’s business generates a higher return on investment than HUN’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. HUN’s free cash flow (“FCF”) per share for the trailing twelve months was +1.26. Comparatively, PX’s free cash flow per share was +0.86. On a percent-of-sales basis, HUN’s free cash flow was 3.13% while PX converted 2.34% of its revenues into cash flow. This means that, for a given level of sales, HUN 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. HUN has a current ratio of 1.90 compared to 1.10 for PX. This means that HUN can more easily cover its most immediate liabilities over the next twelve months. HUN’s debt-to-equity ratio is 1.36 versus a D/E of 1.48 for PX. PX is therefore the more solvent of the two companies, and has lower financial risk.
HUN trades at a forward P/E of 13.81, a P/B of 3.88, and a P/S of 0.97, compared to a forward P/E of 25.24, a P/B of 7.32, and a P/S of 4.13 for PX. HUN 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
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. HUN is currently priced at a -8.59% to its one-year price target of 37.58. Comparatively, PX is -0.52% relative to its price target of 160.81. This suggests that HUN 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 1.80 for HUN and 2.20 for PX, which implies that analysts are more bullish on the outlook for PX.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. HUN has a beta of 2.87 and PX’s beta is 1.02. PX’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. HUN has a short ratio of 1.54 compared to a short interest of 3.59 for PX. This implies that the market is currently less bearish on the outlook for HUN.
Huntsman Corporation (NYSE:HUN) beats Praxair, Inc. (NYSE:PX) on a total of 10 of the 14 factors compared between the two stocks. HUN has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, HUN is the cheaper of the two stocks on an earnings, book value and sales basis, HUN is more undervalued relative to its price target. Finally, HUN has better sentiment signals based on short interest.