The Kraft Heinz Company (NASDAQ:KHC) shares are down more than -0.81% this year and recently decreased -0.98% or -$0.76 to settle at $77.13. Lamb Weston Holdings, Inc. (NYSE:LW), on the other hand, is up 2.75% year to date as of 01/10/2018. It currently trades at $58.00 and has returned 1.36% during the past week.
The Kraft Heinz Company (NASDAQ:KHC) and Lamb Weston Holdings, Inc. (NYSE:LW) are the two most active stocks in the Food – Major Diversified 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.
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 KHC to grow earnings at a 9.87% annual rate over the next 5 years. Comparatively, LW is expected to grow at a 10.35% annual rate. All else equal, LW’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 20.2% for Lamb Weston Holdings, Inc. (LW). KHC’s ROI is 5.30% while LW has a ROI of 19.60%. The interpretation is that LW’s business generates a higher return on investment than KHC’s.
Cash is king when it comes to investing. KHC’s free cash flow (“FCF”) per share for the trailing twelve months was -1.52. Comparatively, LW’s free cash flow per share was -0.26. On a percent-of-sales basis, KHC’s free cash flow was -6.99% while LW converted -1.2% of its revenues into cash flow. This means that, for a given level of sales, LW is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. KHC has a current ratio of 0.80 compared to 1.60 for LW. This means that LW can more easily cover its most immediate liabilities over the next twelve months.
KHC trades at a forward P/E of 19.71, a P/B of 1.60, and a P/S of 3.59, compared to a forward P/E of 20.56, and a P/S of 2.64 for LW. KHC is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B 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
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. KHC is currently priced at a -14.58% to its one-year price target of 90.29. Comparatively, LW is -1.28% relative to its price target of 58.75. This suggests that KHC 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 2.70 for KHC and 2.00 for LW, which implies that analysts are more bullish on the outlook for KHC.
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. KHC has a short ratio of 5.01 compared to a short interest of 4.00 for LW. This implies that the market is currently less bearish on the outlook for LW.
Lamb Weston Holdings, Inc. (NYSE:LW) beats The Kraft Heinz Company (NASDAQ:KHC) on a total of 10 of the 14 factors compared between the two stocks. LW is more profitable, 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, LW is the cheaper of the two stocks on book value and sales basis, Finally, LW has better sentiment signals based on short interest.