Leggett & Platt, Incorporated (NYSE:LEG) shares are down more than -1.49% this year and recently increased 0.32% or $0.15 to settle at $47.02. Infosys Limited (NYSE:INFY), on the other hand, is up 13.38% year to date as of 03/13/2018. It currently trades at $18.39 and has returned 2.22% during the past week.
Leggett & Platt, Incorporated (NYSE:LEG) and Infosys Limited (NYSE:INFY) 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.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect LEG to grow earnings at a 0.60% annual rate over the next 5 years. Comparatively, INFY is expected to grow at a 9.00% annual rate. All else equal, INFY’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Leggett & Platt, Incorporated (LEG) has an EBITDA margin of 14.47%. This suggests that LEG underlying business is more profitable LEG’s ROI is 15.50% while INFY has a ROI of 16.40%. The interpretation is that INFY’s business generates a higher return on investment than LEG’s.
If there’s one thing investors care more about than earnings, it’s cash flow. LEG’s free cash flow (“FCF”) per share for the trailing twelve months was +0.69. Comparatively, INFY’s free cash flow per share was +2.36. On a percent-of-sales basis, LEG’s free cash flow was 2.31% while INFY converted 50.21% of its revenues into cash flow. This means that, for a given level of sales, INFY 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. LEG has a current ratio of 1.80 compared to 3.70 for INFY. This means that INFY can more easily cover its most immediate liabilities over the next twelve months. LEG’s debt-to-equity ratio is 1.05 versus a D/E of 0.00 for INFY. LEG is therefore the more solvent of the two companies, and has lower financial risk.
LEG trades at a forward P/E of 15.34, a P/B of 5.36, and a P/S of 1.62, compared to a forward P/E of 17.20, a P/B of 3.76, and a P/S of 3.67 for INFY. 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. LEG is currently priced at a -14.73% to its one-year price target of 55.14. Comparatively, INFY is 8.37% relative to its price target of 16.97. This suggests that LEG 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 2.30 for LEG and 2.80 for INFY, which implies that analysts are more bullish on the outlook for INFY.
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. LEG has a beta of 0.92 and INFY’s beta is 0.59. INFY’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.LEG has a short ratio of 6.86 compared to a short interest of 13.98 for INFY. This implies that the market is currently less bearish on the outlook for LEG.
Infosys Limited (NYSE:INFY) beats Leggett & Platt, Incorporated (NYSE:LEG) on a total of 8 of the 14 factors compared between the two stocks. INFY is more profitable, 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. Finally, HRG has better sentiment signals based on short interest.