Earnings

Critical Comparison: Tesla, Inc. (TSLA) vs. The Interpublic Group of Companies, Inc. (IPG)

Tesla, Inc. (NASDAQ:TSLA) shares are up more than 9.79% this year and recently decreased -1.06% or -$3.67 to settle at $341.84. The Interpublic Group of Companies, Inc. (NYSE:IPG), on the other hand, is up 16.27% year to date as of 03/13/2018. It currently trades at $23.44 and has returned -0.97% during the past week.

Tesla, Inc. (NASDAQ:TSLA) and The Interpublic Group of Companies, Inc. (NYSE:IPG) are the two most active stocks in the market based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect TSLA to grow earnings at a 35.00% annual rate over the next 5 years. Comparatively, IPG is expected to grow at a 7.37% annual rate. All else equal, TSLA’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. EBITDA margin of 14.33% for The Interpublic Group of Companies, Inc. (IPG). TSLA’s ROI is -6.50% while IPG has a ROI of 17.70%. The interpretation is that IPG’s business generates a higher return on investment than TSLA’s.

Cash Flow 




Earnings don’t always accurately reflect the amount of cash that a company brings in. TSLA’s free cash flow (“FCF”) per share for the trailing twelve months was -2.35. Comparatively, IPG’s free cash flow per share was +2.30. On a percent-of-sales basis, TSLA’s free cash flow was -3.38% while IPG converted 11.22% of its revenues into cash flow. This means that, for a given level of sales, IPG is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. TSLA has a current ratio of 0.90 compared to 1.00 for IPG. This means that IPG can more easily cover its most immediate liabilities over the next twelve months. TSLA’s debt-to-equity ratio is 2.43 versus a D/E of 0.62 for IPG. TSLA is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

TSLA trades at a forward P/E of 146.09, a P/B of 13.58, and a P/S of 4.91, compared to a forward P/E of 12.64, a P/B of 4.10, and a P/S of 1.14 for IPG. TSLA 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. TSLA is currently priced at a 5.13% to its one-year price target of 325.17. Comparatively, IPG is -6.54% relative to its price target of 25.08. This suggests that IPG 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 2.90 for TSLA and 2.70 for IPG, which implies that analysts are more bullish on the outlook for TSLA.

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. TSLA has a beta of 1.00 and IPG’s beta is 1.32. TSLA’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. TSLA has a short ratio of 5.08 compared to a short interest of 4.83 for IPG. This implies that the market is currently less bearish on the outlook for IPG.

Summary

The Interpublic Group of Companies, Inc. (NYSE:IPG) beats Tesla, Inc. (NASDAQ:TSLA) on a total of 12 of the 14 factors compared between the two stocks. IPG is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, IPG is the cheaper of the two stocks on an earnings, book value and sales basis, IPG is more undervalued relative to its price target. Finally, IPG has better sentiment signals based on short interest.

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