The Procter & Gamble Company (NYSE:PG) shares are down more than -12.19% this year and recently decreased -1.01% or -$0.82 to settle at $80.68. Johnson & Johnson (NYSE:JNJ), on the other hand, is down -7.19% year to date as of 02/14/2018. It currently trades at $129.67 and has returned -1.33% during the past week.
The Procter & Gamble Company (NYSE:PG) and Johnson & Johnson (NYSE:JNJ) 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.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect PG to grow earnings at a 7.47% annual rate over the next 5 years. Comparatively, JNJ is expected to grow at a 7.77% annual rate. All else equal, JNJ’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. , compared to an EBITDA margin of 33.77% for Johnson & Johnson (JNJ). PG’s ROI is 12.70% while JNJ has a ROI of 17.00%. The interpretation is that JNJ’s business generates a higher return on investment than PG’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. PG’s free cash flow (“FCF”) per share for the trailing twelve months was +0.41. Comparatively, JNJ’s free cash flow per share was -. On a percent-of-sales basis, PG’s free cash flow was 1.59% while JNJ converted 0% of its revenues into cash flow. This means that, for a given level of sales, PG is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. PG has a current ratio of 0.90 compared to 1.30 for JNJ. This means that JNJ can more easily cover its most immediate liabilities over the next twelve months. PG’s debt-to-equity ratio is 0.71 versus a D/E of 0.48 for JNJ. PG is therefore the more solvent of the two companies, and has lower financial risk.
PG trades at a forward P/E of 17.78, a P/B of 3.85, and a P/S of 3.13, compared to a forward P/E of 15.18, a P/B of 4.71, and a P/S of 4.45 for JNJ. 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. PG is currently priced at a -14.1% to its one-year price target of 93.92. Comparatively, JNJ is -14.05% relative to its price target of 150.86. This suggests that PG 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 2.30 for PG and 2.40 for JNJ, which implies that analysts are more bullish on the outlook for JNJ.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. PG has a beta of 0.54 and JNJ’s beta is 0.78. PG’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. PG has a short ratio of 4.11 compared to a short interest of 2.43 for JNJ. This implies that the market is currently less bearish on the outlook for JNJ.
Johnson & Johnson (NYSE:JNJ) beats The Procter & Gamble Company (NYSE:PG) on a total of 7 of the 14 factors compared between the two stocks. JNJ has higher cash flow per share, is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. Finally, JNJ has better sentiment signals based on short interest.