CSX Corporation (NASDAQ:CSX) shares are up more than 4.49% this year and recently decreased -0.19% or -$0.11 to settle at $57.48. Baker Hughes, a GE company (NYSE:BHGE), on the other hand, is down -4.08% year to date as of 03/13/2018. It currently trades at $30.35 and has returned 6.30% during the past week.
CSX Corporation (NASDAQ:CSX) and Baker Hughes, a GE company (NYSE:BHGE) 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.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect CSX to grow earnings at a 17.25% annual rate over the next 5 years. Comparatively, BHGE is expected to grow at a 52.60% annual rate. All else equal, BHGE’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. CSX Corporation (CSX) has an EBITDA margin of 43.86%. This suggests that CSX underlying business is more profitable CSX’s ROI is 9.40% while BHGE has a ROI of -0.70%. The interpretation is that CSX’s business generates a higher return on investment than BHGE’s.
If there’s one thing investors care more about than earnings, it’s cash flow. CSX’s free cash flow (“FCF”) per share for the trailing twelve months was -0.16. Comparatively, BHGE’s free cash flow per share was -. On a percent-of-sales basis, CSX’s free cash flow was -1.24% while BHGE converted 0% of its revenues into cash flow. This means that, for a given level of sales, BHGE is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. CSX has a current ratio of 1.00 compared to 2.10 for BHGE. This means that BHGE can more easily cover its most immediate liabilities over the next twelve months. CSX’s debt-to-equity ratio is 0.80 versus a D/E of 0.21 for BHGE. CSX is therefore the more solvent of the two companies, and has lower financial risk.
CSX trades at a forward P/E of 15.81, a P/B of 3.50, and a P/S of 4.34, compared to a forward P/E of 19.25, a P/B of 0.33, and a P/S of 1.95 for BHGE. CSX is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S 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
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. CSX is currently priced at a -9.19% to its one-year price target of 63.30. Comparatively, BHGE is -16.62% relative to its price target of 36.40. This suggests that BHGE 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 CSX and 2.50 for BHGE, which implies that analysts are more bullish on the outlook for BHGE.
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. CSX has a beta of 1.25 and BHGE’s beta is 0.83. BHGE’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.CSX has a short ratio of 1.84 compared to a short interest of 3.50 for BHGE. This implies that the market is currently less bearish on the outlook for CSX.
Baker Hughes, a GE company (NYSE:BHGE) beats CSX Corporation (NASDAQ:CSX) on a total of 9 of the 14 factors compared between the two stocks. BHGE is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, BHGE is the cheaper of the two stocks on book value and sales basis, BHGE is more undervalued relative to its price target. Finally, ATVI has better sentiment signals based on short interest.