Earnings

Dissecting the Numbers for Lowe’s Companies, Inc. (LOW) and Salesforce.com, inc. (CRM)

Lowe’s Companies, Inc. (NYSE:LOW) shares are up more than 4.29% this year and recently increased 0.91% or $0.87 to settle at $96.93. Salesforce.com, inc. (NYSE:CRM), on the other hand, is up 6.64% year to date as of 02/14/2018. It currently trades at $109.02 and has returned -0.94% during the past week.

Lowe’s Companies, Inc. (NYSE:LOW) and Salesforce.com, inc. (NYSE:CRM) 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

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect LOW to grow earnings at a 17.24% annual rate over the next 5 years. Comparatively, CRM is expected to grow at a 25.05% annual rate. All else equal, CRM’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 12.7% for Salesforce.com, inc. (CRM). LOW’s ROI is 16.90% while CRM has a ROI of 2.10%. The interpretation is that LOW’s business generates a higher return on investment than CRM’s.

Cash Flow 




If there’s one thing investors care more about than earnings, it’s cash flow. LOW’s free cash flow (“FCF”) per share for the trailing twelve months was -0.43. Comparatively, CRM’s free cash flow per share was +0.02. On a percent-of-sales basis, LOW’s free cash flow was -0.55% while CRM converted 0.17% of its revenues into cash flow. This means that, for a given level of sales, CRM 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. LOW has a current ratio of 1.00 compared to 0.80 for CRM. This means that LOW can more easily cover its most immediate liabilities over the next twelve months. LOW’s debt-to-equity ratio is 2.79 versus a D/E of 0.29 for CRM. LOW is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

LOW trades at a forward P/E of 16.88, a P/B of 14.03, and a P/S of 1.17, compared to a forward P/E of 62.91, a P/B of 8.86, and a P/S of 7.72 for CRM. 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

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. LOW is currently priced at a -10.5% to its one-year price target of 108.30. Comparatively, CRM is -10.93% relative to its price target of 122.40. This suggests that CRM 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 1.90 for LOW and 1.80 for CRM, which implies that analysts are more bullish on the outlook for LOW.

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. LOW has a beta of 1.18 and CRM’s beta is 1.29. LOW’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. LOW has a short ratio of 1.43 compared to a short interest of 3.18 for CRM. This implies that the market is currently less bearish on the outlook for LOW.

Summary

Salesforce.com, inc. (NYSE:CRM) beats Lowe’s Companies, Inc. (NYSE:LOW) on a total of 8 of the 14 factors compared between the two stocks. CRM generates a higher return on investment, is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. CRM is more undervalued relative to its price target. Finally, BUD has better sentiment signals based on short interest.

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