Earnings

A Side-by-side Analysis of Fairmount Santrol Holdings Inc. (FMSA) and Blue Buffalo Pet Products, Inc. (BUFF)

 

Fairmount Santrol Holdings Inc. (NYSE:FMSA) shares are down more than -18.36% this year and recently decreased -1.84% or -$0.08 to settle at $4.27. Blue Buffalo Pet Products, Inc. (NASDAQ:BUFF), on the other hand, is up 21.56% year to date as of 03/13/2018. It currently trades at $39.86 and has returned -0.10% during the past week.

Fairmount Santrol Holdings Inc. (NYSE:FMSA) and Blue Buffalo Pet Products, Inc. (NASDAQ:BUFF) 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

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Comparatively, BUFF is expected to grow at a 17.20% annual rate. All else equal, BUFF’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 23.92% for Blue Buffalo Pet Products, Inc. (BUFF). FMSA’s ROI is -6.80% while BUFF has a ROI of 30.10%. The interpretation is that BUFF’s business generates a higher return on investment than FMSA’s.

Cash Flow 




The amount of free cash flow available to investors is ultimately what determines the value of a stock. FMSA’s free cash flow (“FCF”) per share for the trailing twelve months was +0.14. Comparatively, BUFF’s free cash flow per share was +0.10. On a percent-of-sales basis, FMSA’s free cash flow was 0% while BUFF converted 1.53% of its revenues into cash flow. This means that, for a given level of sales, BUFF is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. FMSA has a current ratio of 2.50 compared to 3.70 for BUFF. This means that BUFF can more easily cover its most immediate liabilities over the next twelve months. FMSA’s debt-to-equity ratio is 2.69 versus a D/E of 1.32 for BUFF. FMSA is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

FMSA trades at a forward P/E of 10.05, a P/B of 3.23, and a P/S of 0.96, compared to a forward P/E of 27.06, a P/B of 26.05, and a P/S of 6.11 for BUFF. FMSA 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. FMSA is currently priced at a -31.79% to its one-year price target of 6.26. Comparatively, BUFF is 4.21% relative to its price target of 38.25. This suggests that FMSA 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 FMSA and 2.80 for BUFF, which implies that analysts are more bullish on the outlook for BUFF.

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. FMSA has a short ratio of 7.50 compared to a short interest of 2.90 for BUFF. This implies that the market is currently less bearish on the outlook for BUFF.

Summary

Blue Buffalo Pet Products, Inc. (NASDAQ:BUFF) beats Fairmount Santrol Holdings Inc. (NYSE:FMSA) on a total of 8 of the 14 factors compared between the two stocks. BUFF has higher cash flow per share, is more profitable, generates a higher return on investment, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, FMSA is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, BUFF has better sentiment signals based on short interest.

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