T-Mobile US, Inc. (NASDAQ:TMUS) shares are down more than -7.70% this year and recently increased 1.61% or $0.93 to settle at $58.62. Coty Inc. (NYSE:COTY), on the other hand, is up 6.84% year to date as of 02/14/2018. It currently trades at $21.25 and has returned 21.57% during the past week.
T-Mobile US, Inc. (NASDAQ:TMUS) and Coty Inc. (NYSE:COTY) 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.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect TMUS to grow earnings at a 29.84% annual rate over the next 5 years. Comparatively, COTY is expected to grow at a 16.60% annual rate. All else equal, TMUS’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 4.36% for Coty Inc. (COTY). TMUS’s ROI is 11.70% while COTY has a ROI of -1.10%. The interpretation is that TMUS’s business generates a higher return on investment than COTY’s.
The value of a stock is simply the present value of its future free cash flows. TMUS’s free cash flow (“FCF”) per share for the trailing twelve months was +1.29. Comparatively, COTY’s free cash flow per share was +0.14. On a percent-of-sales basis, TMUS’s free cash flow was 2.71% while COTY converted 1.37% of its revenues into cash flow. This means that, for a given level of sales, TMUS is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. TMUS has a current ratio of 0.80 compared to 0.90 for COTY. This means that COTY can more easily cover its most immediate liabilities over the next twelve months. TMUS’s debt-to-equity ratio is 1.37 versus a D/E of 0.79 for COTY. TMUS is therefore the more solvent of the two companies, and has lower financial risk.
TMUS trades at a forward P/E of 14.30, a P/B of 2.18, and a P/S of 1.19, compared to a forward P/E of 22.78, a P/B of 1.69, and a P/S of 1.75 for COTY. 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. TMUS is currently priced at a -20.01% to its one-year price target of 73.28. Comparatively, COTY is 6.36% relative to its price target of 19.98. This suggests that TMUS 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 TMUS and 2.50 for COTY, which implies that analysts are more bullish on the outlook for COTY.
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. TMUS has a beta of 0.56 and COTY’s beta is 0.25. COTY’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. TMUS has a short ratio of 1.97 compared to a short interest of 10.04 for COTY. This implies that the market is currently less bearish on the outlook for TMUS.
T-Mobile US, Inc. (NASDAQ:TMUS) beats Coty Inc. (NYSE:COTY) on a total of 10 of the 14 factors compared between the two stocks. TMUS is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, TMUS is the cheaper of the two stocks on an earnings and sales basis, TMUS is more undervalued relative to its price target. Finally, TMUS has better sentiment signals based on short interest.