Earnings

A Side-by-side Analysis of The Goodyear Tire & Rubber Company (GT) and TransUnion (TRU)

 

The Goodyear Tire & Rubber Company (NASDAQ:GT) shares are down more than -12.26% this year and recently decreased -1.87% or -$0.54 to settle at $28.35. TransUnion (NYSE:TRU), on the other hand, is up 6.10% year to date as of 03/13/2018. It currently trades at $58.31 and has returned 2.21% during the past week.

The Goodyear Tire & Rubber Company (NASDAQ:GT) and TransUnion (NYSE:TRU) are the two most active stocks in the market based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect GT to grow earnings at a 6.49% annual rate over the next 5 years. Comparatively, TRU is expected to grow at a 12.85% annual rate. All else equal, TRU’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 35.97% for TransUnion (TRU). GT’s ROI is 9.30% while TRU has a ROI of 8.60%. The interpretation is that GT’s business generates a higher return on investment than TRU’s.

Cash Flow 




The amount of free cash flow available to investors is ultimately what determines the value of a stock. GT’s free cash flow (“FCF”) per share for the trailing twelve months was +4.42. Comparatively, TRU’s free cash flow per share was +0.39. On a percent-of-sales basis, GT’s free cash flow was 6.91% while TRU converted 3.7% of its revenues into cash flow. This means that, for a given level of sales, GT 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. GT has a current ratio of 1.20 compared to 1.30 for TRU. This means that TRU can more easily cover its most immediate liabilities over the next twelve months. GT’s debt-to-equity ratio is 1.24 versus a D/E of 1.43 for TRU. TRU is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

GT trades at a forward P/E of 6.41, a P/B of 1.50, and a P/S of 0.45, compared to a forward P/E of 22.51, a P/B of 6.16, and a P/S of 5.51 for TRU. GT 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. GT is currently priced at a -22.6% to its one-year price target of 36.63. Comparatively, TRU is -3.44% relative to its price target of 60.39. This suggests that GT 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 GT and 1.90 for TRU, which implies that analysts are more bullish on the outlook for GT.

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. GT has a short ratio of 5.44 compared to a short interest of 2.22 for TRU. This implies that the market is currently less bearish on the outlook for TRU.

Summary

The Goodyear Tire & Rubber Company (NASDAQ:GT) beats TransUnion (NYSE:TRU) on a total of 8 of the 14 factors compared between the two stocks. GT generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, GT is the cheaper of the two stocks on an earnings, book value and sales basis, GT is more undervalued relative to its price target. Finally, CFG has better sentiment signals based on short interest.

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