KAR Auction Services, Inc. (NYSE:KAR) shares are up more than 10.69% this year and recently decreased -0.37% or -$0.21 to settle at $55.91. HRG Group, Inc. (NYSE:HRG), on the other hand, is down -10.38% year to date as of 03/13/2018. It currently trades at $15.19 and has returned -6.64% during the past week.
KAR Auction Services, Inc. (NYSE:KAR) and HRG Group, Inc. (NYSE:HRG) 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 KAR to grow earnings at a 12.45% annual rate over the next 5 years. Comparatively, HRG is expected to grow at a 4.00% annual rate. All else equal, KAR’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 97.13% for HRG Group, Inc. (HRG). KAR’s ROI is 9.90% while HRG has a ROI of 7.20%. The interpretation is that KAR’s business generates a higher return on investment than HRG’s.
The value of a stock is simply the present value of its future free cash flows. KAR’s free cash flow (“FCF”) per share for the trailing twelve months was +0.26. Comparatively, HRG’s free cash flow per share was -0.39. On a percent-of-sales basis, KAR’s free cash flow was 1.01% while HRG converted -1.57% of its revenues into cash flow. This means that, for a given level of sales, KAR is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. KAR has a current ratio of 1.30 compared to 2.20 for HRG. This means that HRG can more easily cover its most immediate liabilities over the next twelve months. KAR’s debt-to-equity ratio is 1.80 versus a D/E of 7.10 for HRG. HRG is therefore the more solvent of the two companies, and has lower financial risk.
KAR trades at a forward P/E of 16.96, a P/B of 5.07, and a P/S of 2.18, compared to a P/B of 3.71, and a P/S of 0.61 for HRG. KAR 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
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”. KAR is currently priced at a -8.34% to its one-year price target of 61.00. Comparatively, HRG is -30.95% relative to its price target of 22.00. This suggests that HRG 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 1.80 for KAR and 2.00 for HRG, which implies that analysts are more bullish on the outlook for HRG.
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. KAR has a beta of 1.14 and HRG’s beta is 1.52. KAR’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.KAR has a short ratio of 1.47 compared to a short interest of 1.16 for HRG. This implies that the market is currently less bearish on the outlook for HRG.
HRG Group, Inc. (NYSE:HRG) beats KAR Auction Services, Inc. (NYSE:KAR) on a total of 7 of the 14 factors compared between the two stocks. HRG is growing fastly and higher liquidity. In terms of valuation, HRG is the cheaper of the two stocks on an earnings, book value and sales basis, HRG is more undervalued relative to its price target. Finally, HRG has better sentiment signals based on short interest.