Earnings

A Side-by-side Analysis of Twitter, Inc. (TWTR) and CVS Health Corporation (CVS)

Twitter, Inc. (NYSE:TWTR) shares are up more than 40.57% this year and recently increased 0.93% or $0.31 to settle at $33.75. CVS Health Corporation (NYSE:CVS), on the other hand, is down -3.74% year to date as of 02/14/2018. It currently trades at $69.79 and has returned -6.13% during the past week.

Twitter, Inc. (NYSE:TWTR) and CVS Health Corporation (NYSE:CVS) are the two most active stocks in the market based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect TWTR to grow earnings at a 41.60% annual rate over the next 5 years. Comparatively, CVS is expected to grow at a 2.28% annual rate. All else equal, TWTR’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 6.73% for CVS Health Corporation (CVS). TWTR’s ROI is -6.10% while CVS has a ROI of 9.90%. The interpretation is that CVS’s business generates a higher return on investment than TWTR’s.

Cash Flow 




The amount of free cash flow available to investors is ultimately what determines the value of a stock. TWTR’s free cash flow (“FCF”) per share for the trailing twelve months was +0.21. Comparatively, CVS’s free cash flow per share was -1.13. On a percent-of-sales basis, TWTR’s free cash flow was 6.38% while CVS converted -0.62% of its revenues into cash flow. This means that, for a given level of sales, TWTR is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. TWTR has a current ratio of 10.40 compared to 1.00 for CVS. This means that TWTR can more easily cover its most immediate liabilities over the next twelve months. TWTR’s debt-to-equity ratio is 0.37 versus a D/E of 0.74 for CVS. CVS is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

TWTR trades at a forward P/E of 51.37, a P/B of 5.14, and a P/S of 9.83, compared to a forward P/E of 10.33, a P/B of 2.03, and a P/S of 0.40 for CVS. TWTR 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

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. TWTR is currently priced at a 38.21% to its one-year price target of 24.42. Comparatively, CVS is -21.84% relative to its price target of 89.29. This suggests that CVS 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 3.10 for TWTR and 2.00 for CVS, which implies that analysts are more bullish on the outlook for TWTR.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. TWTR has a beta of 0.58 and CVS’s beta is 0.96. TWTR’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. TWTR has a short ratio of 1.61 compared to a short interest of 3.96 for CVS. This implies that the market is currently less bearish on the outlook for TWTR.

Summary

Twitter, Inc. (NYSE:TWTR) beats CVS Health Corporation (NYSE:CVS) on a total of 8 of the 14 factors compared between the two stocks. TWTR is growing fastly, is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. Finally, TWTR has better sentiment signals based on short interest.

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