Rexnord Corporation (NYSE:RXN) shares are up more than 8.03% this year and recently increased 3.00% or $0.82 to settle at $28.11. Illinois Tool Works Inc. (NYSE:ITW), on the other hand, is up 1.29% year to date as of 01/11/2018. It currently trades at $169.00 and has returned 1.72% during the past week.
Rexnord Corporation (NYSE:RXN) and Illinois Tool Works Inc. (NYSE:ITW) are the two most active stocks in the Diversified Machinery industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect RXN to grow earnings at a 11.43% annual rate over the next 5 years. Comparatively, ITW is expected to grow at a 10.68% annual rate. All else equal, RXN’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 26.33% for Illinois Tool Works Inc. (ITW). RXN’s ROI is 6.20% while ITW has a ROI of 18.10%. The interpretation is that ITW’s business generates a higher return on investment than RXN’s.
If there’s one thing investors care more about than earnings, it’s cash flow. RXN’s free cash flow (“FCF”) per share for the trailing twelve months was +0.08. Comparatively, ITW’s free cash flow per share was +1.38. On a percent-of-sales basis, RXN’s free cash flow was 0.43% while ITW converted 3.48% of its revenues into cash flow. This means that, for a given level of sales, ITW 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. RXN has a current ratio of 3.10 compared to 2.40 for ITW. This means that RXN can more easily cover its most immediate liabilities over the next twelve months. RXN’s debt-to-equity ratio is 1.39 versus a D/E of 1.62 for ITW. ITW is therefore the more solvent of the two companies, and has lower financial risk.
RXN trades at a forward P/E of 18.35, a P/B of 2.50, and a P/S of 1.50, compared to a forward P/E of 23.41, a P/B of 11.55, and a P/S of 4.11 for ITW. RXN 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. RXN is currently priced at a 2.85% to its one-year price target of 27.33. Comparatively, ITW is -2.06% relative to its price target of 172.56. This suggests that ITW 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 2.20 for RXN and 2.30 for ITW, which implies that analysts are more bullish on the outlook for ITW.
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. RXN has a beta of 1.77 and ITW’s beta is 1.21. ITW’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. RXN has a short ratio of 2.83 compared to a short interest of 3.04 for ITW. This implies that the market is currently less bearish on the outlook for RXN.
Rexnord Corporation (NYSE:RXN) beats Illinois Tool Works Inc. (NYSE:ITW) on a total of 8 of the 14 factors compared between the two stocks. RXN is growing fastly, higher liquidity and has lower financial risk. In terms of valuation, RXN is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, RXN has better sentiment signals based on short interest.