Earnings

A Side-by-side Analysis of Ensco plc (ESV) and Macy’s, Inc. (M)

Ensco plc (NYSE:ESV) shares are down more than -15.23% this year and recently decreased -1.57% or -$0.08 to settle at $5.01. Macy’s, Inc. (NYSE:M), on the other hand, is up 1.79% year to date as of 02/14/2018. It currently trades at $25.64 and has returned 3.55% during the past week.

Ensco plc (NYSE:ESV) and Macy’s, Inc. (NYSE:M) are the two most active stocks in the market based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

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. Comparatively, M is expected to grow at a 18.64% annual rate. All else equal, M’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 9.84% for Macy’s, Inc. (M). ESV’s ROI is 6.10% while M has a ROI of 8.70%. The interpretation is that M’s business generates a higher return on investment than ESV’s.

Cash Flow 




If there’s one thing investors care more about than earnings, it’s cash flow. ESV’s free cash flow (“FCF”) per share for the trailing twelve months was -0.18. Comparatively, M’s free cash flow per share was -1.22. On a percent-of-sales basis, ESV’s free cash flow was -3.68% while M converted -1.44% of its revenues into cash flow. This means that, for a given level of sales, M 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. ESV has a current ratio of 5.00 compared to 1.30 for M. This means that ESV can more easily cover its most immediate liabilities over the next twelve months. ESV’s debt-to-equity ratio is 0.58 versus a D/E of 1.49 for M. M is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

ESV trades at a P/B of 0.18, and a P/S of 1.16, compared to a forward P/E of 8.66, a P/B of 1.85, and a P/S of 0.32 for M. 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”. ESV is currently priced at a -26.43% to its one-year price target of 6.81. Comparatively, M is -3.79% relative to its price target of 26.65. This suggests that ESV 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 2.60 for ESV and 2.90 for M, which implies that analysts are more bullish on the outlook for M.

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. ESV has a beta of 1.73 and M’s beta is 0.95. M’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. ESV has a short ratio of 5.86 compared to a short interest of 3.46 for M. This implies that the market is currently less bearish on the outlook for M.

Summary

Ensco plc (NYSE:ESV) beats Macy’s, Inc. (NYSE:M) on a total of 8 of the 14 factors compared between the two stocks. ESV is more profitable, has higher cash flow per share, higher liquidity and has lower financial risk. In terms of valuation, ESV is the cheaper of the two stocks on an earnings and book value, ESV is more undervalued relative to its price target. Finally, VRX has better sentiment signals based on short interest.

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