Accenture plc (NYSE:ACN) shares are up more than 6.14% this year and recently increased 0.49% or $0.8 to settle at $162.49. Radian Group Inc. (NYSE:RDN), on the other hand, is down -3.01% year to date as of 03/13/2018. It currently trades at $19.99 and has returned -5.57% during the past week.
Accenture plc (NYSE:ACN) and Radian Group Inc. (NYSE:RDN) 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect ACN to grow earnings at a 10.07% annual rate over the next 5 years. Comparatively, RDN is expected to grow at a 13.83% annual rate. All else equal, RDN’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., compared to an EBITDA margin of 33.52% for Radian Group Inc. (RDN). ACN’s ROI is 40.70% while RDN has a ROI of 7.10%. The interpretation is that ACN’s business generates a higher return on investment than RDN’s.
The value of a stock is simply the present value of its future free cash flows. ACN’s free cash flow (“FCF”) per share for the trailing twelve months was +0.03. Comparatively, RDN’s free cash flow per share was -. On a percent-of-sales basis, ACN’s free cash flow was 0.05% while RDN converted 0% of its revenues into cash flow. This means that, for a given level of sales, ACN is able to generate more free cash flow for investors.
Liquidity and Financial Risk
ACN’s debt-to-equity ratio is 0.00 versus a D/E of 0.34 for RDN. RDN is therefore the more solvent of the two companies, and has lower financial risk.
ACN trades at a forward P/E of 22.46, a P/B of 10.99, and a P/S of 2.71, compared to a forward P/E of 7.44, a P/B of 1.44, and a P/S of 3.53 for RDN. ACN is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B 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
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. ACN is currently priced at a -1.87% to its one-year price target of 165.58. Comparatively, RDN is -26.02% relative to its price target of 27.02. This suggests that RDN 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 ACN and 1.90 for RDN, which implies that analysts are more bullish on the outlook for ACN.
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. ACN has a beta of 0.99 and RDN’s beta is 1.50. ACN’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. ACN has a short ratio of 3.36 compared to a short interest of 1.01 for RDN. This implies that the market is currently less bearish on the outlook for RDN.
Radian Group Inc. (NYSE:RDN) beats Accenture plc (NYSE:ACN) on a total of 7 of the 14 factors compared between the two stocks. RDN generates a higher return on investment and is more profitable. In terms of valuation, RDN is the cheaper of the two stocks on an earnings and book value, RDN is more undervalued relative to its price target. Finally, RDN has better sentiment signals based on short interest.