Earnings

A Side-by-side Analysis of Netflix, Inc. (NFLX) and Halliburton Company (HAL)

Netflix, Inc. (NASDAQ:NFLX) shares are up more than 38.57% this year and recently increased 2.99% or $7.73 to settle at $266.00. Halliburton Company (NYSE:HAL), on the other hand, is down -2.05% year to date as of 02/14/2018. It currently trades at $47.87 and has returned -3.66% during the past week.

Netflix, Inc. (NASDAQ:NFLX) and Halliburton Company (NYSE:HAL) are the two most active stocks in the market 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.

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. Comparatively, HAL is expected to grow at a 20.40% annual rate. All else equal, HAL’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 15.76% for Halliburton Company (HAL). NFLX’s ROI is 9.00% while HAL has a ROI of -22.60%. The interpretation is that NFLX’s business generates a higher return on investment than HAL’s.

Cash Flow 




Cash is king when it comes to investing. NFLX’s free cash flow (“FCF”) per share for the trailing twelve months was -1.14. Comparatively, HAL’s free cash flow per share was +0.48. On a percent-of-sales basis, NFLX’s free cash flow was -4.23% while HAL converted 2.04% of its revenues into cash flow. This means that, for a given level of sales, HAL 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. NFLX has a current ratio of 1.40 compared to 2.20 for HAL. This means that HAL can more easily cover its most immediate liabilities over the next twelve months. NFLX’s debt-to-equity ratio is 1.81 versus a D/E of 1.19 for HAL. NFLX is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

NFLX trades at a forward P/E of 63.51, a P/B of 32.16, and a P/S of 9.87, compared to a forward P/E of 13.84, a P/B of 4.53, and a P/S of 2.06 for HAL. NFLX is the expensive 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 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. NFLX is currently priced at a 0.28% to its one-year price target of 265.27. Comparatively, HAL is -25.13% relative to its price target of 63.94. This suggests that HAL 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 2.20 for NFLX and 1.80 for HAL, which implies that analysts are more bullish on the outlook for NFLX.

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. NFLX has a beta of 1.09 and HAL’s beta is 1.04. HAL’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. NFLX has a short ratio of 2.85 compared to a short interest of 2.28 for HAL. This implies that the market is currently less bearish on the outlook for HAL.

Summary

Halliburton Company (NYSE:HAL) beats Netflix, Inc. (NASDAQ:NFLX) on a total of 13 of the 14 factors compared between the two stocks. HAL generates a higher return on investment, is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, HAL is the cheaper of the two stocks on an earnings, book value and sales basis, HAL is more undervalued relative to its price target. Finally, HAL has better sentiment signals based on short interest.

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