Emerson Electric Co. (NYSE:EMR) shares are up more than 2.21% this year and recently decreased -0.27% or -$0.19 to settle at $71.23. Signet Jewelers Limited (NYSE:SIG), on the other hand, is down -15.28% year to date as of 03/13/2018. It currently trades at $47.91 and has returned -1.72% during the past week.
Emerson Electric Co. (NYSE:EMR) and Signet Jewelers Limited (NYSE:SIG) 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 EMR to grow earnings at a 12.00% annual rate over the next 5 years. Comparatively, SIG is expected to grow at a 7.00% annual rate. All else equal, EMR’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 13.75% for Signet Jewelers Limited (SIG). EMR’s ROI is 13.70% while SIG has a ROI of 15.20%. The interpretation is that SIG’s business generates a higher return on investment than EMR’s.
The value of a stock is simply the present value of its future free cash flows. EMR’s free cash flow (“FCF”) per share for the trailing twelve months was +0.06. Comparatively, SIG’s free cash flow per share was +16.40. On a percent-of-sales basis, EMR’s free cash flow was 0.25% while SIG converted 15.49% of its revenues into cash flow. This means that, for a given level of sales, SIG 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. EMR has a current ratio of 1.30 compared to 2.60 for SIG. This means that SIG can more easily cover its most immediate liabilities over the next twelve months. EMR’s debt-to-equity ratio is 0.65 versus a D/E of 0.46 for SIG. EMR is therefore the more solvent of the two companies, and has lower financial risk.
EMR trades at a forward P/E of 19.87, a P/B of 5.45, and a P/S of 2.87, compared to a forward P/E of 7.87, a P/B of 1.35, and a P/S of 0.46 for SIG. EMR 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. EMR is currently priced at a -4.56% to its one-year price target of 74.63. Comparatively, SIG is -17.78% relative to its price target of 58.27. This suggests that SIG 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 2.50 for EMR and 2.70 for SIG, which implies that analysts are more bullish on the outlook for SIG.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. EMR has a beta of 1.18 and SIG’s beta is 0.70. SIG’s shares are therefore the less volatile of the two stocks.
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. EMR has a short ratio of 1.98 compared to a short interest of 4.44 for SIG. This implies that the market is currently less bearish on the outlook for EMR.
Signet Jewelers Limited (NYSE:SIG) beats Emerson Electric Co. (NYSE:EMR) on a total of 10 of the 14 factors compared between the two stocks. SIG is growing fastly, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, SIG is the cheaper of the two stocks on an earnings, book value and sales basis, SIG is more undervalued relative to its price target. Finally, BBT has better sentiment signals based on short interest.