NIKE, Inc. (NYSE:NKE) shares are up more than 5.79% this year and recently decreased -0.97% or -$0.65 to settle at $66.17. FirstEnergy Corp. (NYSE:FE), on the other hand, is up 7.74% year to date as of 03/13/2018. It currently trades at $32.99 and has returned 3.58% during the past week.
NIKE, Inc. (NYSE:NKE) and FirstEnergy Corp. (NYSE:FE) 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.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect NKE to grow earnings at a 7.51% annual rate over the next 5 years. Comparatively, FE is expected to grow at a -4.74% annual rate. All else equal, NKE’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 14.4% for FirstEnergy Corp. (FE). NKE’s ROI is 25.30% while FE has a ROI of -2.70%. The interpretation is that NKE’s business generates a higher return on investment than FE’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. NKE’s free cash flow (“FCF”) per share for the trailing twelve months was +0.48. Comparatively, FE’s free cash flow per share was +1.13. On a percent-of-sales basis, NKE’s free cash flow was 2.27% while FE converted 3.83% of its revenues into cash flow. This means that, for a given level of sales, FE is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. NKE has a current ratio of 2.50 compared to 0.80 for FE. This means that NKE can more easily cover its most immediate liabilities over the next twelve months. NKE’s debt-to-equity ratio is 0.40 versus a D/E of 5.73 for FE. FE is therefore the more solvent of the two companies, and has lower financial risk.
NKE trades at a forward P/E of 24.75, a P/B of 9.15, and a P/S of 3.05, compared to a forward P/E of 13.69, a P/B of 3.73, and a P/S of 1.04 for FE. NKE 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. NKE is currently priced at a -1.93% to its one-year price target of 67.47. Comparatively, FE is -7.82% relative to its price target of 35.79. This suggests that FE 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 NKE and 2.30 for FE, which implies that analysts are equally bullish on their outlook for the two stocks.
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. NKE has a beta of 0.65 and FE’s beta is 0.31. FE’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. NKE has a short ratio of 2.99 compared to a short interest of 0.00 for FE. This implies that the market is currently less bearish on the outlook for FE.
FirstEnergy Corp. (NYSE:FE) beats NIKE, Inc. (NYSE:NKE) on a total of 8 of the 14 factors compared between the two stocks. FE is growing fastly and has a higher cash conversion rate. In terms of valuation, FE is the cheaper of the two stocks on an earnings, book value and sales basis, FE is more undervalued relative to its price target. Finally, FE has better sentiment signals based on short interest.