The Southern Company (NYSE:SO) shares are down more than -9.38% this year and recently decreased -2.33% or -$1.04 to settle at $43.58. Avis Budget Group, Inc. (NASDAQ:CAR), on the other hand, is down -11.74% year to date as of 02/14/2018. It currently trades at $38.73 and has returned -12.49% during the past week.
The Southern Company (NYSE:SO) and Avis Budget Group, Inc. (NASDAQ:CAR) 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.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect SO to grow earnings at a 2.25% annual rate over the next 5 years. Comparatively, CAR is expected to grow at a 6.00% annual rate. All else equal, CAR’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 4.46% for Avis Budget Group, Inc. (CAR). SO’s ROI is 5.10% while CAR has a ROI of 4.90%. The interpretation is that SO’s business generates a higher return on investment than CAR’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. SO’s free cash flow (“FCF”) per share for the trailing twelve months was +0.00. Comparatively, CAR’s free cash flow per share was -8.40. On a percent-of-sales basis, SO’s free cash flow was 0% while CAR converted -7.9% of its revenues into cash flow. This means that, for a given level of sales, SO 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. SO has a current ratio of 0.70 compared to 1.30 for CAR. This means that CAR can more easily cover its most immediate liabilities over the next twelve months. SO’s debt-to-equity ratio is 2.08 versus a D/E of 35.30 for CAR. CAR is therefore the more solvent of the two companies, and has lower financial risk.
SO trades at a forward P/E of 14.58, a P/B of 1.82, and a P/S of 1.90, compared to a forward P/E of 12.85, a P/B of 7.99, and a P/S of 0.36 for CAR. SO is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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. SO is currently priced at a -9.32% to its one-year price target of 48.06. Comparatively, CAR is -10.97% relative to its price target of 43.50. This suggests that CAR 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 3.20 for SO and 2.20 for CAR, which implies that analysts are more bullish on the outlook for SO.
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. SO has a beta of 0.12 and CAR’s beta is 2.24. SO’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. SO has a short ratio of 4.20 compared to a short interest of 8.31 for CAR. This implies that the market is currently less bearish on the outlook for SO.
The Southern Company (NYSE:SO) beats Avis Budget Group, Inc. (NASDAQ:CAR) on a total of 8 of the 14 factors compared between the two stocks. SO is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. Finally, SO has better sentiment signals based on short interest.