CVS Health Corporation (NYSE:CVS) shares are down more than -5.71% this year and recently increased 1.26% or $0.85 to settle at $68.36. Bill Barrett Corporation (NYSE:BBG), on the other hand, is down -10.92% year to date as of 03/08/2018. It currently trades at $4.57 and has returned 4.58% during the past week.
CVS Health Corporation (NYSE:CVS) and Bill Barrett Corporation (NYSE:BBG) are the two most active stocks in the market based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect CVS to grow earnings at a 7.66% annual rate over the next 5 years. Comparatively, BBG is expected to grow at a 31.00% annual rate. All else equal, BBG’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 31.2% for Bill Barrett Corporation (BBG). CVS’s ROI is 12.20% while BBG has a ROI of -6.00%. The interpretation is that CVS’s business generates a higher return on investment than BBG’s.
The value of a stock is simply the present value of its future free cash flows. CVS’s free cash flow (“FCF”) per share for the trailing twelve months was -1.13. Comparatively, BBG’s free cash flow per share was +0.01. On a percent-of-sales basis, CVS’s free cash flow was -0.62% while BBG converted 0% of its revenues into cash flow. This means that, for a given level of sales, BBG is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. CVS has a current ratio of 1.00 compared to 2.50 for BBG. This means that BBG can more easily cover its most immediate liabilities over the next twelve months. CVS’s debt-to-equity ratio is 0.72 versus a D/E of 1.03 for BBG. BBG is therefore the more solvent of the two companies, and has lower financial risk.
CVS trades at a forward P/E of 10.17, a P/B of 1.84, and a P/S of 0.38, compared to a forward P/E of 10.20, a P/B of 0.64, and a P/S of 1.74 for BBG. 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. CVS is currently priced at a -22.8% to its one-year price target of 88.55. Comparatively, BBG is -34.34% relative to its price target of 6.96. This suggests that BBG 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 2.00 for CVS and 2.40 for BBG, which implies that analysts are more bullish on the outlook for BBG.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. CVS has a beta of 1.00 and BBG’s beta is 3.56. CVS’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. CVS has a short ratio of 4.61 compared to a short interest of 4.61 for BBG. This implies that the market is currently less bearish on the outlook for BBG.
Bill Barrett Corporation (NYSE:BBG) beats CVS Health Corporation (NYSE:CVS) on a total of 7 of the 14 factors compared between the two stocks. BBG generates a higher return on investment, is more profitable, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. BBG is more undervalued relative to its price target. Finally, BBG has better sentiment signals based on short interest.