Kellogg Company (NYSE:K) shares are up more than 2.44% this year and recently decreased -0.27% or -$0.19 to settle at $69.64. Cenovus Energy Inc. (NYSE:CVE), on the other hand, is down -11.50% year to date as of 03/13/2018. It currently trades at $8.08 and has returned -1.10% during the past week.
Kellogg Company (NYSE:K) and Cenovus Energy Inc. (NYSE:CVE) 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.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect K to grow earnings at a 6.76% annual rate over the next 5 years.
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. Kellogg Company (K) has an EBITDA margin of 18.66%. This suggests that K underlying business is more profitable K’s ROI is 14.20% while CVE has a ROI of 1.30%. The interpretation is that K’s business generates a higher return on investment than CVE’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. K’s free cash flow (“FCF”) per share for the trailing twelve months was +0.61. Comparatively, CVE’s free cash flow per share was +0.11. On a percent-of-sales basis, K’s free cash flow was 1.63% while CVE converted 1.03% of its revenues into cash flow. This means that, for a given level of sales, K 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. K has a current ratio of 0.70 compared to 1.10 for CVE. This means that CVE can more easily cover its most immediate liabilities over the next twelve months. K’s debt-to-equity ratio is 3.89 versus a D/E of 0.00 for CVE. K is therefore the more solvent of the two companies, and has lower financial risk.
K trades at a forward P/E of 14.80, a P/B of 10.95, and a P/S of 1.88, compared to a forward P/E of 17.49, a P/B of 0.64, and a P/S of 0.73 for CVE. K 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
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. K is currently priced at a -4.34% to its one-year price target of 72.80. Comparatively, CVE is -25.53% relative to its price target of 10.85. This suggests that CVE 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 2.70 for K and 2.50 for CVE, which implies that analysts are more bullish on the outlook for K.
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. K has a beta of 0.46 and CVE’s beta is 0.91. K’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.K has a short ratio of 9.04 compared to a short interest of 4.72 for CVE. This implies that the market is currently less bearish on the outlook for CVE.
Cenovus Energy Inc. (NYSE:CVE) beats Kellogg Company (NYSE:K) on a total of 7 of the 14 factors compared between the two stocks. CVE is growing fastly and has lower financial risk. In terms of valuation, CVE is the cheaper of the two stocks on book value and sales basis, CVE is more undervalued relative to its price target. Finally, CVE has better sentiment signals based on short interest.