Earnings

A Side-by-side Analysis of NetApp, Inc. (NTAP) and The Williams Companies, Inc. (WMB)

NetApp, Inc. (NASDAQ:NTAP) shares are up more than 9.62% this year and recently increased 3.23% or $1.9 to settle at $60.64. The Williams Companies, Inc. (NYSE:WMB), on the other hand, is down -1.67% year to date as of 02/14/2018. It currently trades at $29.98 and has returned -0.07% during the past week.

NetApp, Inc. (NASDAQ:NTAP) and The Williams Companies, Inc. (NYSE:WMB) 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

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect NTAP to grow earnings at a 16.08% annual rate over the next 5 years. Comparatively, WMB is expected to grow at a 10.00% annual rate. All else equal, NTAP’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 42.43% for The Williams Companies, Inc. (WMB). NTAP’s ROI is 10.70% while WMB has a ROI of 1.00%. The interpretation is that NTAP’s business generates a higher return on investment than WMB’s.

Cash Flow 




If there’s one thing investors care more about than earnings, it’s cash flow. NTAP’s free cash flow (“FCF”) per share for the trailing twelve months was +0.84. Comparatively, WMB’s free cash flow per share was -0.24. On a percent-of-sales basis, NTAP’s free cash flow was 4.06% while WMB converted -2.65% of its revenues into cash flow. This means that, for a given level of sales, NTAP is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. NTAP has a current ratio of 1.70 compared to 1.00 for WMB. This means that NTAP can more easily cover its most immediate liabilities over the next twelve months. NTAP’s debt-to-equity ratio is 1.08 versus a D/E of 2.60 for WMB. WMB is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

NTAP trades at a forward P/E of 16.55, a P/B of 5.88, and a P/S of 2.90, compared to a forward P/E of 30.65, a P/B of 3.06, and a P/S of 3.10 for WMB. 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. NTAP is currently priced at a 2.07% to its one-year price target of 59.41. Comparatively, WMB is -16.12% relative to its price target of 35.74. This suggests that WMB 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 NTAP and 2.00 for WMB, which implies that analysts are more bullish on the outlook for NTAP.

Risk and Volatility

No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. NTAP has a beta of 1.28 and WMB’s beta is 1.26. WMB’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. NTAP has a short ratio of 2.89 compared to a short interest of 3.25 for WMB. This implies that the market is currently less bearish on the outlook for NTAP.

Summary

NetApp, Inc. (NASDAQ:NTAP) beats The Williams Companies, Inc. (NYSE:WMB) on a total of 9 of the 14 factors compared between the two stocks. NTAP is growing fastly, 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, NTAP is the cheaper of the two stocks on an earnings and sales basis, Finally, NTAP has better sentiment signals based on short interest.

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