Berkshire Hathaway Inc. (NYSE:BRK-B) shares are up more than 2.87% this year and recently increased 1.68% or $3.36 to settle at $203.90. Cardinal Health, Inc. (NYSE:CAH), on the other hand, is up 11.15% year to date as of 02/15/2018. It currently trades at $68.10 and has returned 2.21% during the past week.
Berkshire Hathaway Inc. (NYSE:BRK-B) and Cardinal Health, Inc. (NYSE:CAH) are the two most active stocks in the market based on recent 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect BRK-B to grow earnings at a 8.80% annual rate over the next 5 years. Comparatively, CAH is expected to grow at a 5.83% annual rate. All else equal, BRK-B’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. EBITDA margin of 1.97% for Cardinal Health, Inc. (CAH).
BRK-B trades at a forward P/E of 22.86, a P/B of 0.00, and a P/S of 2.12, compared to a forward P/E of 11.43, a P/B of 2.82, and a P/S of 0.16 for CAH. BRK-B 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. BRK-B is currently priced at a -11.54% to its one-year price target of 230.50. Comparatively, CAH is -7.4% relative to its price target of 73.54. This suggests that BRK-B 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 2.20 for BRK-B and 3.00 for CAH, which implies that analysts are more bullish on the outlook for CAH.
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. BRK-B has a short ratio of 2.71 compared to a short interest of 2.72 for CAH. This implies that the market is currently less bearish on the outlook for BRK-B.
Berkshire Hathaway Inc. (NYSE:BRK-B) beats Cardinal Health, Inc. (NYSE:CAH) on a total of 7 of the 13 factors compared between the two stocks. BRK-B is growing fastly and has lower financial risk. BRK-B is more undervalued relative to its price target. Finally, BRK-B has better sentiment signals based on short interest.