Earnings

A Side-by-side Analysis of AbbVie Inc. (ABBV) and McDonald’s Corporation (MCD)

AbbVie Inc. (NYSE:ABBV) shares are up more than 16.93% this year and recently increased 1.09% or $1.22 to settle at $113.08. McDonald’s Corporation (NYSE:MCD), on the other hand, is down -7.05% year to date as of 02/14/2018. It currently trades at $159.99 and has returned -3.45% during the past week.

AbbVie Inc. (NYSE:ABBV) and McDonald’s Corporation (NYSE:MCD) are the two most active stocks in the market based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

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 ABBV to grow earnings at a 17.14% annual rate over the next 5 years. Comparatively, MCD is expected to grow at a 8.45% annual rate. All else equal, ABBV’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 46.08% for McDonald’s Corporation (MCD). ABBV’s ROI is 18.00% while MCD has a ROI of 23.40%. The interpretation is that MCD’s business generates a higher return on investment than ABBV’s.

Cash Flow 




The amount of free cash flow available to investors is ultimately what determines the value of a stock. On a percent-of-sales basis, ABBV’s free cash flow was 0% while MCD converted 0% of its revenues into cash flow. This means that, for a given level of sales, ABBV is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. ABBV has a current ratio of 1.50 compared to 1.30 for MCD. This means that ABBV can more easily cover its most immediate liabilities over the next twelve months.

Valuation

ABBV trades at a forward P/E of 13.03, a P/B of 26.99, and a P/S of 6.62, compared to a forward P/E of 19.42, and a P/S of 5.61 for MCD. ABBV 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

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. ABBV is currently priced at a -9.68% to its one-year price target of 125.20. Comparatively, MCD is -15.65% relative to its price target of 189.68. This suggests that MCD 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 2.40 for ABBV and 2.00 for MCD, which implies that analysts are more bullish on the outlook for ABBV.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. ABBV has a beta of 1.43 and MCD’s beta is 0.63. MCD’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. ABBV has a short ratio of 3.03 compared to a short interest of 1.84 for MCD. This implies that the market is currently less bearish on the outlook for MCD.

Summary

McDonald’s Corporation (NYSE:MCD) beats AbbVie Inc. (NYSE:ABBV) on a total of 9 of the 14 factors compared between the two stocks. MCD is growing fastly, generates a higher return on investment and has lower financial risk. In terms of valuation, MCD is the cheaper of the two stocks on book value and sales basis, MCD is more undervalued relative to its price target. Finally, MCD has better sentiment signals based on short interest.

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