Kinder Morgan, Inc. (NYSE:KMI) shares are down more than -3.43% this year and recently increased 0.35% or $0.06 to settle at $17.45. SLM Corporation (NASDAQ:SLM), on the other hand, is down -2.30% year to date as of 02/14/2018. It currently trades at $11.04 and has returned -1.25% during the past week.
Kinder Morgan, Inc. (NYSE:KMI) and SLM Corporation (NASDAQ:SLM) 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.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect KMI to grow earnings at a 34.84% annual rate over the next 5 years. Comparatively, SLM is expected to grow at a 25.86% annual rate. All else equal, KMI’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 85.81% for SLM Corporation (SLM). KMI’s ROI is 2.70% while SLM has a ROI of 1.00%. The interpretation is that KMI’s business generates a higher return on investment than SLM’s.
Cash is king when it comes to investing. On a percent-of-sales basis, KMI’s free cash flow was 0% while SLM converted 0% of its revenues into cash flow. This means that, for a given level of sales, KMI is able to generate more free cash flow for investors.
Liquidity and Financial Risk
KMI’s debt-to-equity ratio is 1.09 versus a D/E of 8.94 for SLM. SLM is therefore the more solvent of the two companies, and has lower financial risk.
KMI trades at a forward P/E of 19.41, a P/B of 1.11, and a P/S of 2.77, compared to a forward P/E of 9.32, a P/B of 2.36, and a P/S of 3.33 for SLM. 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. KMI is currently priced at a -21.71% to its one-year price target of 22.29. Comparatively, SLM is -26.84% relative to its price target of 15.09. This suggests that SLM 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 KMI and 1.60 for SLM, which implies that analysts are more bullish on the outlook for KMI.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. KMI has a beta of 0.55 and SLM’s beta is 1.24. KMI’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. KMI has a short ratio of 3.95 compared to a short interest of 4.42 for SLM. This implies that the market is currently less bearish on the outlook for KMI.
Kinder Morgan, Inc. (NYSE:KMI) beats SLM Corporation (NASDAQ:SLM) on a total of 8 of the 14 factors compared between the two stocks. KMI is growing fastly, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, KMI is the cheaper of the two stocks on book value and sales basis, Finally, KMI has better sentiment signals based on short interest.