Masco Corporation (NYSE:MAS) shares are up more than 4.07% this year and recently increased 2.28% or $1.02 to settle at $45.73. USG Corporation (NYSE:USG), on the other hand, is up 2.44% year to date as of 01/10/2018. It currently trades at $39.50 and has returned 3.92% during the past week.

Masco Corporation (NYSE:MAS) and USG Corporation (NYSE:USG) are the two most active stocks in the General Building 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.

**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 MAS to grow earnings at a 18.42% annual rate over the next 5 years. Comparatively, USG is expected to grow at a 10.00% annual rate. All else equal, MAS’s higher growth rate would imply a greater potential for capital appreciation.

**Profitability and Returns**

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. 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 16.97% for USG Corporation (USG). MAS’s ROI is 28.00% while USG has a ROI of 9.90%. The interpretation is that MAS’s business generates a higher return on investment than USG’s.

**Cash Flow **

The value of a stock is simply the present value of its future free cash flows. MAS’s free cash flow (“FCF”) per share for the trailing twelve months was +0.77. Comparatively, USG’s free cash flow per share was +0.26. On a percent-of-sales basis, MAS’s free cash flow was 3.29% while USG converted 1.22% of its revenues into cash flow. This means that, for a given level of sales, MAS 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. MAS has a current ratio of 1.90 compared to 2.40 for USG. This means that USG can more easily cover its most immediate liabilities over the next twelve months.

**Valuation**

MAS trades at a forward P/E of 19.88, and a P/S of 1.89, compared to a forward P/E of 18.44, a P/B of 2.83, and a P/S of 1.69 for USG. MAS 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**

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. MAS is currently priced at a 0.26% to its one-year price target of 45.61. Comparatively, USG is 16.18% relative to its price target of 34.00. This suggests that MAS 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 2.10 for MAS and 3.00 for USG, which implies that analysts are more bullish on the outlook for USG.

**Risk and Volatility**

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. MAS has a beta of 1.55 and USG’s beta is 1.20. USG’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. MAS has a short ratio of 2.96 compared to a short interest of 6.60 for USG. This implies that the market is currently less bearish on the outlook for MAS.

**Summary**

Masco Corporation (NYSE:MAS) beats USG Corporation (NYSE:USG) on a total of 9 of the 14 factors compared between the two stocks. MAS is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. MAS is more undervalued relative to its price target. Finally, MAS has better sentiment signals based on short interest.