STMicroelectronics N.V. (NYSE:STM) shares are up more than 9.52% this year and recently decreased -2.72% or -$0.67 to settle at $23.92. KBR, Inc. (NYSE:KBR), on the other hand, is down -15.43% year to date as of 03/13/2018. It currently trades at $16.77 and has returned 6.27% during the past week.
STMicroelectronics N.V. (NYSE:STM) and KBR, Inc. (NYSE:KBR) are the two most active stocks in the market based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider 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 STM to grow earnings at a 49.00% annual rate over the next 5 years. Comparatively, KBR is expected to grow at a -2.49% annual rate. All else equal, STM’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. EBITDA margin of 1.83% for KBR, Inc. (KBR). STM’s ROI is 11.30% while KBR has a ROI of 17.00%. The interpretation is that KBR’s business generates a higher return on investment than STM’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. On a percent-of-sales basis, STM’s free cash flow was 0% while KBR converted 0.4% of its revenues into cash flow. This means that, for a given level of sales, KBR is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. STM has a current ratio of 2.50 compared to 1.30 for KBR. This means that STM can more easily cover its most immediate liabilities over the next twelve months. STM’s debt-to-equity ratio is 0.31 versus a D/E of 0.41 for KBR. KBR is therefore the more solvent of the two companies, and has lower financial risk.
STM trades at a forward P/E of 16.16, a P/B of 3.94, and a P/S of 2.61, compared to a forward P/E of 11.22, a P/B of 1.92, and a P/S of 0.57 for KBR. STM 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
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. STM is currently priced at a -12.89% to its one-year price target of 27.46. Comparatively, KBR is -13.47% relative to its price target of 19.38. This suggests that KBR 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 2.40 for STM and 2.40 for KBR, which implies that analysts are equally bullish on their outlook for the two stocks.
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. STM has a beta of 0.81 and KBR’s beta is 1.23. STM’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.STM has a short ratio of 1.78 compared to a short interest of 3.26 for KBR. This implies that the market is currently less bearish on the outlook for STM.
KBR, Inc. (NYSE:KBR) beats STMicroelectronics N.V. (NYSE:STM) on a total of 8 of the 14 factors compared between the two stocks. KBR is growing fastly, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, KBR is the cheaper of the two stocks on an earnings, book value and sales basis, KBR is more undervalued relative to its price target. Finally, HRG has better sentiment signals based on short interest.