Pilgrim’s Pride Corporation (NASDAQ:PPC) shares are down more than -4.99% this year and recently decreased -1.40% or -$0.42 to settle at $29.51. Cal-Maine Foods, Inc. (NASDAQ:CALM), on the other hand, is up 2.25% year to date as of 01/10/2018. It currently trades at $45.45 and has returned 3.77% during the past week.
Pilgrim’s Pride Corporation (NASDAQ:PPC) and Cal-Maine Foods, Inc. (NASDAQ:CALM) are the two most active stocks in the Food – Major Diversified industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
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 PPC to grow earnings at a -6.60% annual rate over the next 5 years. Comparatively, CALM is expected to grow at a -10.00% annual rate. All else equal, PPC’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. Pilgrim’s Pride Corporation (PPC) has an EBITDA margin of 14.11%. This suggests that PPC underlying business is more profitable PPC’s ROI is 13.80% while CALM has a ROI of -10.80%. The interpretation is that PPC’s business generates a higher return on investment than CALM’s.
The value of a stock is simply the present value of its future free cash flows. PPC’s free cash flow (“FCF”) per share for the trailing twelve months was +0.88. Comparatively, CALM’s free cash flow per share was +1.71. On a percent-of-sales basis, PPC’s free cash flow was 2.76% while CALM converted 7.73% of its revenues into cash flow. This means that, for a given level of sales, CALM 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. PPC has a current ratio of 1.70 compared to 6.70 for CALM. This means that CALM can more easily cover its most immediate liabilities over the next twelve months. PPC’s debt-to-equity ratio is 1.54 versus a D/E of 0.01 for CALM. PPC is therefore the more solvent of the two companies, and has lower financial risk.
PPC trades at a forward P/E of 10.05, a P/B of 4.31, and a P/S of 0.74, compared to a forward P/E of 28.23, a P/B of 2.65, and a P/S of 2.16 for CALM. 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”. PPC is currently priced at a -11.91% to its one-year price target of 33.50. Comparatively, CALM is 8.21% relative to its price target of 42.00. This suggests that PPC 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 2.80 for PPC and 2.70 for CALM, which implies that analysts are more bullish on the outlook for PPC.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. PPC has a beta of 0.17 and CALM’s beta is 0.75. PPC’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. PPC has a short ratio of 14.56 compared to a short interest of 16.13 for CALM. This implies that the market is currently less bearish on the outlook for PPC.
Pilgrim’s Pride Corporation (NASDAQ:PPC) beats Cal-Maine Foods, Inc. (NASDAQ:CALM) on a total of 8 of the 14 factors compared between the two stocks. PPC is growing fastly, is more profitable and generates a higher return on investment. In terms of valuation, PPC is the cheaper of the two stocks on an earnings and sales basis, PPC is more undervalued relative to its price target. Finally, PPC has better sentiment signals based on short interest.