The Home Depot, Inc. (NYSE:HD) shares are down more than -2.55% this year and recently increased 0.53% or $0.97 to settle at $184.69. Medtronic plc (NYSE:MDT), on the other hand, is up 1.37% year to date as of 02/14/2018. It currently trades at $81.86 and has returned 0.63% during the past week.
The Home Depot, Inc. (NYSE:HD) and Medtronic plc (NYSE:MDT) are the two most active stocks in the market based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
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 HD to grow earnings at a 15.66% annual rate over the next 5 years. Comparatively, MDT is expected to grow at a 7.30% annual rate. All else equal, HD’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. 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 29.78% for Medtronic plc (MDT). HD’s ROI is 31.80% while MDT has a ROI of 5.70%. The interpretation is that HD’s business generates a higher return on investment than MDT’s.
The value of a stock is simply the present value of its future free cash flows. HD’s free cash flow (“FCF”) per share for the trailing twelve months was +0.28. Comparatively, MDT’s free cash flow per share was +0.03. On a percent-of-sales basis, HD’s free cash flow was 0.35% while MDT converted 0.14% of its revenues into cash flow. This means that, for a given level of sales, HD is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. HD has a current ratio of 1.20 compared to 2.40 for MDT. This means that MDT can more easily cover its most immediate liabilities over the next twelve months. HD’s debt-to-equity ratio is 10.06 versus a D/E of 0.56 for MDT. HD is therefore the more solvent of the two companies, and has lower financial risk.
HD trades at a forward P/E of 20.30, a P/B of 84.72, and a P/S of 2.17, compared to a forward P/E of 15.82, a P/B of 2.16, and a P/S of 3.74 for MDT. HD is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B 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
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. HD is currently priced at a -12.24% to its one-year price target of 210.45. Comparatively, MDT is -10.99% relative to its price target of 91.97. This suggests that HD 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 1.80 for HD and 2.20 for MDT, which implies that analysts are more bullish on the outlook for MDT.
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. HD has a beta of 1.11 and MDT’s beta is 0.95. MDT’s shares are therefore the less volatile of the two stocks.
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.HD has a short ratio of 2.26 compared to a short interest of 2.08 for MDT. This implies that the market is currently less bearish on the outlook for MDT.
Medtronic plc (NYSE:MDT) beats The Home Depot, Inc. (NYSE:HD) on a total of 7 of the 14 factors compared between the two stocks. MDT is growing fastly, higher liquidity and has lower financial risk. In terms of valuation, MDT is the cheaper of the two stocks on an earnings and book value, Finally, MDT has better sentiment signals based on short interest.