Adobe Systems Incorporated (NASDAQ:ADBE) shares are up more than 25.41% this year and recently decreased -0.53% or -$1.18 to settle at $219.76. Amgen Inc. (NASDAQ:AMGN), on the other hand, is up 9.11% year to date as of 03/13/2018. It currently trades at $189.75 and has returned -0.32% during the past week.
Adobe Systems Incorporated (NASDAQ:ADBE) and Amgen Inc. (NASDAQ:AMGN) are the two most active stocks in the market based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
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 ADBE to grow earnings at a 23.75% annual rate over the next 5 years. Comparatively, AMGN is expected to grow at a 4.28% annual rate. All else equal, ADBE’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 44.87% for Amgen Inc. (AMGN). ADBE’s ROI is 16.70% while AMGN has a ROI of 14.00%. The interpretation is that ADBE’s business generates a higher return on investment than AMGN’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. ADBE’s free cash flow (“FCF”) per share for the trailing twelve months was +1.59. Comparatively, AMGN’s free cash flow per share was +2.80. On a percent-of-sales basis, ADBE’s free cash flow was 10.74% while AMGN converted 8.83% of its revenues into cash flow. This means that, for a given level of sales, ADBE 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. ADBE has a current ratio of 2.10 compared to 5.50 for AMGN. This means that AMGN can more easily cover its most immediate liabilities over the next twelve months. ADBE’s debt-to-equity ratio is 0.22 versus a D/E of 1.40 for AMGN. AMGN is therefore the more solvent of the two companies, and has lower financial risk.
ADBE trades at a forward P/E of 30.97, a P/B of 12.78, and a P/S of 14.81, compared to a forward P/E of 13.51, a P/B of 5.45, and a P/S of 6.02 for AMGN. ADBE is the expensive 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. ADBE is currently priced at a 1.03% to its one-year price target of 217.53. Comparatively, AMGN is -3.32% relative to its price target of 196.27. This suggests that AMGN 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 1.90 for ADBE and 2.40 for AMGN, which implies that analysts are more bullish on the outlook for AMGN.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. ADBE has a beta of 1.07 and AMGN’s beta is 1.34. ADBE’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. ADBE has a short ratio of 1.93 compared to a short interest of 2.17 for AMGN. This implies that the market is currently less bearish on the outlook for ADBE.
Amgen Inc. (NASDAQ:AMGN) beats Adobe Systems Incorporated (NASDAQ:ADBE) on a total of 7 of the 14 factors compared between the two stocks. AMGN is growing fastly, has higher cash flow per share and higher liquidity. In terms of valuation, AMGN is the cheaper of the two stocks on an earnings, book value and sales basis, AMGN is more undervalued relative to its price target.