Earnings

A Side-by-side Analysis of Alcoa Corporation (AA) and Deere & Company (DE)

Alcoa Corporation (NYSE:AA) shares are down more than -9.80% this year and recently increased 0.48% or $0.23 to settle at $48.59. Deere & Company (NYSE:DE), on the other hand, is up 3.07% year to date as of 03/13/2018. It currently trades at $161.32 and has returned 1.77% during the past week.

Alcoa Corporation (NYSE:AA) and Deere & Company (NYSE:DE) 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.

Growth

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 AA to grow earnings at a 8.60% annual rate over the next 5 years. Comparatively, DE is expected to grow at a 26.13% annual rate. All else equal, DE’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 19.61% for Deere & Company (DE). AA’s ROI is 10.60% while DE has a ROI of 6.50%. The interpretation is that AA’s business generates a higher return on investment than DE’s.

Cash Flow 




The value of a stock is simply the present value of its future free cash flows. AA’s free cash flow (“FCF”) per share for the trailing twelve months was +0.02. Comparatively, DE’s free cash flow per share was -6.29. On a percent-of-sales basis, AA’s free cash flow was 0.03% while DE converted -6.85% of its revenues into cash flow. This means that, for a given level of sales, AA is able to generate more free cash flow for investors.

Liquidity and Financial Risk

AA’s debt-to-equity ratio is 0.31 versus a D/E of 4.39 for DE. DE is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

AA trades at a forward P/E of 13.04, a P/B of 1.98, and a P/S of 0.77, compared to a forward P/E of 14.12, a P/B of 5.63, and a P/S of 1.61 for DE. AA is the cheaper 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

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. AA is currently priced at a -21.17% to its one-year price target of 61.64. Comparatively, DE is -12.91% relative to its price target of 185.24. This suggests that AA 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 AA and 2.30 for DE, which implies that analysts are more bullish on the outlook for DE.

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. AA has a short ratio of 2.06 compared to a short interest of 3.29 for DE. This implies that the market is currently less bearish on the outlook for AA.

Summary

Alcoa Corporation (NYSE:AA) beats Deere & Company (NYSE:DE) on a total of 12 of the 14 factors compared between the two stocks. AA generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, AA is the cheaper of the two stocks on an earnings, book value and sales basis, AA is more undervalued relative to its price target. Finally, AA has better sentiment signals based on short interest.

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