Diebold Nixdorf, Incorporated (NYSE:DBD) shares are up more than 11.31% this year and recently increased 5.20% or $0.9 to settle at $18.20. Arista Networks, Inc. (NYSE:ANET), on the other hand, is up 10.70% year to date as of 01/11/2018. It currently trades at $260.79 and has returned 12.08% during the past week.
Diebold Nixdorf, Incorporated (NYSE:DBD) and Arista Networks, Inc. (NYSE:ANET) are the two most active stocks in the Diversified Computer Systems 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.
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 DBD to grow earnings at a 29.69% annual rate over the next 5 years. Comparatively, ANET is expected to grow at a 23.50% annual rate. All else equal, DBD’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 28.93% for Arista Networks, Inc. (ANET). DBD’s ROI is -3.90% while ANET has a ROI of 16.20%. The interpretation is that ANET’s business generates a higher return on investment than DBD’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. DBD’s free cash flow (“FCF”) per share for the trailing twelve months was -0.96. Comparatively, ANET’s free cash flow per share was +2.56. On a percent-of-sales basis, DBD’s free cash flow was -2.19% while ANET converted 16.58% of its revenues into cash flow. This means that, for a given level of sales, ANET is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. DBD has a current ratio of 1.50 compared to 3.70 for ANET. This means that ANET can more easily cover its most immediate liabilities over the next twelve months. DBD’s debt-to-equity ratio is 3.33 versus a D/E of 0.00 for ANET. DBD is therefore the more solvent of the two companies, and has lower financial risk.
DBD trades at a forward P/E of 11.77, a P/B of 2.40, and a P/S of 0.30, compared to a forward P/E of 42.11, a P/B of 12.42, and a P/S of 12.44 for ANET. DBD 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. DBD is currently priced at a -25.41% to its one-year price target of 24.40. Comparatively, ANET is 14.8% relative to its price target of 227.17. This suggests that DBD 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 2.30 for DBD and 2.10 for ANET, which implies that analysts are more bullish on the outlook for DBD.
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. DBD has a beta of 2.02 and ANET’s beta is 1.33. ANET’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. DBD has a short ratio of 12.28 compared to a short interest of 3.79 for ANET. This implies that the market is currently less bearish on the outlook for ANET.
Arista Networks, Inc. (NYSE:ANET) beats Diebold Nixdorf, Incorporated (NYSE:DBD) on a total of 9 of the 14 factors compared between the two stocks. ANET 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, DBD is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, ANET has better sentiment signals based on short interest.