Square, Inc. (NYSE:SQ) shares are up more than 20.71% this year and recently decreased -0.62% or -$0.26 to settle at $41.85. Valeant Pharmaceuticals International, Inc. (NYSE:VRX), on the other hand, is down -11.60% year to date as of 02/14/2018. It currently trades at $18.37 and has returned 3.38% during the past week.
Square, Inc. (NYSE:SQ) and Valeant Pharmaceuticals International, Inc. (NYSE:VRX) are the two most active stocks in the market based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
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. Comparatively, VRX is expected to grow at a -10.13% annual rate. All else equal, SQ’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. EBITDA margin of 35.16% for Valeant Pharmaceuticals International, Inc. (VRX). SQ’s ROI is -29.90% while VRX has a ROI of -1.60%. The interpretation is that VRX’s business generates a higher return on investment than SQ’s.
The value of a stock is simply the present value of its future free cash flows. SQ’s free cash flow (“FCF”) per share for the trailing twelve months was +0.09. Comparatively, VRX’s free cash flow per share was +1.49. On a percent-of-sales basis, SQ’s free cash flow was 2.05% while VRX converted 5.37% of its revenues into cash flow. This means that, for a given level of sales, VRX 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. SQ has a current ratio of 1.80 compared to 1.30 for VRX. This means that SQ can more easily cover its most immediate liabilities over the next twelve months. SQ’s debt-to-equity ratio is 0.48 versus a D/E of 5.22 for VRX. VRX is therefore the more solvent of the two companies, and has lower financial risk.
SQ trades at a forward P/E of 92.38, a P/B of 21.91, and a P/S of 7.92, compared to a forward P/E of 5.24, a P/B of 1.21, and a P/S of 0.72 for VRX. SQ 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. SQ is currently priced at a -0.36% to its one-year price target of 42.00. Comparatively, VRX is 5.33% relative to its price target of 17.44. This suggests that SQ 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 2.40 for SQ and 3.10 for VRX, which implies that analysts are more bullish on the outlook for VRX.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.SQ has a short ratio of 1.73 compared to a short interest of 1.37 for VRX. This implies that the market is currently less bearish on the outlook for VRX.
Valeant Pharmaceuticals International, Inc. (NYSE:VRX) beats Square, Inc. (NYSE:SQ) on a total of 9 of the 14 factors compared between the two stocks. VRX is growing fastly, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, VRX is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, VRX has better sentiment signals based on short interest.