ARRIS International plc (NASDAQ:ARRS) shares are down more than -1.09% this year and recently increased 0.08% or $0.02 to settle at $25.41. Barracuda Networks, Inc. (NYSE:CUDA), on the other hand, is up 0.15% year to date as of 01/25/2018. It currently trades at $27.54 and has returned 0.00% during the past week.
ARRIS International plc (NASDAQ:ARRS) and Barracuda Networks, Inc. (NYSE:CUDA) are the two most active stocks in the Communication Equipment 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.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect ARRS to grow earnings at a 19.50% annual rate over the next 5 years. Comparatively, CUDA is expected to grow at a 8.90% annual rate. All else equal, ARRS’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 11.1% for Barracuda Networks, Inc. (CUDA). ARRS’s ROI is 1.80% while CUDA has a ROI of 98.10%. The interpretation is that CUDA’s business generates a higher return on investment than ARRS’s.
If there’s one thing investors care more about than earnings, it’s cash flow. ARRS’s free cash flow (“FCF”) per share for the trailing twelve months was +0.51. Comparatively, CUDA’s free cash flow per share was +0.41. On a percent-of-sales basis, ARRS’s free cash flow was 1.4% while CUDA converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, ARRS 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. ARRS has a current ratio of 1.80 compared to 0.90 for CUDA. This means that ARRS can more easily cover its most immediate liabilities over the next twelve months. ARRS’s debt-to-equity ratio is 0.69 versus a D/E of 0.00 for CUDA. ARRS is therefore the more solvent of the two companies, and has lower financial risk.
ARRS trades at a forward P/E of 8.66, a P/B of 1.49, and a P/S of 0.72, compared to a forward P/E of 30.77, a P/B of 38.79, and a P/S of 3.94 for CUDA. ARRS 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. ARRS is currently priced at a -25% to its one-year price target of 33.88. Comparatively, CUDA is -4.21% relative to its price target of 28.75. This suggests that ARRS 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 1.90 for ARRS and 2.70 for CUDA, which implies that analysts are more bullish on the outlook for CUDA.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. ARRS has a beta of 1.31 and CUDA’s beta is 3.14. ARRS’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.ARRS has a short ratio of 1.97 compared to a short interest of 0.59 for CUDA. This implies that the market is currently less bearish on the outlook for CUDA.
ARRIS International plc (NASDAQ:ARRS) beats Barracuda Networks, Inc. (NYSE:CUDA) on a total of 11 of the 14 factors compared between the two stocks. ARRS is growing fastly, is more profitable, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, ARRS is the cheaper of the two stocks on an earnings, book value and sales basis, ARRS is more undervalued relative to its price target. Finally, ATEN has better sentiment signals based on short interest.