Earnings

A Side-by-side Analysis of Microsoft Corporation (MSFT) and Altria Group, Inc. (MO)

Microsoft Corporation (NASDAQ:MSFT) shares are up more than 6.16% this year and recently increased 1.09% or $0.98 to settle at $90.81. Altria Group, Inc. (NYSE:MO), on the other hand, is down -8.72% year to date as of 02/14/2018. It currently trades at $65.18 and has returned -2.41% during the past week.

Microsoft Corporation (NASDAQ:MSFT) and Altria Group, Inc. (NYSE:MO) 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

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect MSFT to grow earnings at a 11.31% annual rate over the next 5 years. Comparatively, MO is expected to grow at a 8.00% annual rate. All else equal, MSFT’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., compared to an EBITDA margin of 95.67% for Altria Group, Inc. (MO). MSFT’s ROI is 11.70% while MO has a ROI of 53.30%. The interpretation is that MO’s business generates a higher return on investment than MSFT’s.

Cash Flow 




The amount of free cash flow available to investors is ultimately what determines the value of a stock. MSFT’s free cash flow (“FCF”) per share for the trailing twelve months was +0.27. Comparatively, MO’s free cash flow per share was -. On a percent-of-sales basis, MSFT’s free cash flow was 2.31% while MO converted 0% of its revenues into cash flow. This means that, for a given level of sales, MSFT 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. MSFT has a current ratio of 2.90 compared to 0.80 for MO. This means that MSFT can more easily cover its most immediate liabilities over the next twelve months. MSFT’s debt-to-equity ratio is 1.14 versus a D/E of 0.00 for MO. MSFT is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

MSFT trades at a forward P/E of 23.07, a P/B of 8.94, and a P/S of 7.08, compared to a forward P/E of 15.00, a P/B of 10.26, and a P/S of 4.80 for MO. MSFT is the cheaper of the two stocks on book value basis but is expensive in terms of P/E 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 isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. MSFT is currently priced at a -12.88% to its one-year price target of 104.24. Comparatively, MO is -15.6% relative to its price target of 77.23. This suggests that MO 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 1.80 for MSFT and 1.90 for MO, which implies that analysts are more bullish on the outlook for MO.

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. MSFT has a beta of 1.11 and MO’s beta is 0.65. MO’s shares are therefore the less volatile of the two stocks.

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. MSFT has a short ratio of 1.78 compared to a short interest of 1.95 for MO. This implies that the market is currently less bearish on the outlook for MSFT.

Summary

Altria Group, Inc. (NYSE:MO) beats Microsoft Corporation (NASDAQ:MSFT) on a total of 7 of the 14 factors compared between the two stocks. MO is growing fastly, generates a higher return on investment and has lower financial risk. In terms of valuation, MO is the cheaper of the two stocks on an earnings and sales basis, MO is more undervalued relative to its price target. Finally, BX has better sentiment signals based on short interest.

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