Rio Tinto plc (NYSE:RIO) shares are down more than -1.68% this year and recently decreased -0.34% or -$0.18 to settle at $52.04. Maxim Integrated Products, Inc. (NASDAQ:MXIM), on the other hand, is up 18.96% year to date as of 03/13/2018. It currently trades at $62.19 and has returned -0.94% during the past week.
Rio Tinto plc (NYSE:RIO) and Maxim Integrated Products, Inc. (NASDAQ:MXIM) 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 consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect RIO to grow earnings at a 16.80% annual rate over the next 5 years. Comparatively, MXIM is expected to grow at a 15.02% annual rate. All else equal, RIO’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. EBITDA margin of 37.63% for Maxim Integrated Products, Inc. (MXIM). RIO’s ROI is 17.30% while MXIM has a ROI of 15.90%. The interpretation is that RIO’s business generates a higher return on investment than MXIM’s.
If there’s one thing investors care more about than earnings, it’s cash flow. On a percent-of-sales basis, RIO’s free cash flow was 0% while MXIM converted 3.61% of its revenues into cash flow. This means that, for a given level of sales, MXIM 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. RIO has a current ratio of 1.70 compared to 4.50 for MXIM. This means that MXIM can more easily cover its most immediate liabilities over the next twelve months. RIO’s debt-to-equity ratio is 0.36 versus a D/E of 0.75 for MXIM. MXIM is therefore the more solvent of the two companies, and has lower financial risk.
RIO trades at a forward P/E of 10.36, a P/B of 2.07, and a P/S of 2.32, compared to a forward P/E of 21.85, a P/B of 8.82, and a P/S of 5.58 for MXIM. RIO is the cheaper 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
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. RIO is currently priced at a -14.53% to its one-year price target of 60.89. Comparatively, MXIM is 1.72% relative to its price target of 61.14. This suggests that RIO 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 1.90 for RIO and 2.50 for MXIM, which implies that analysts are more bullish on the outlook for MXIM.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. RIO has a beta of 1.23 and MXIM’s beta is 1.14. MXIM’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. RIO has a short ratio of 3.29 compared to a short interest of 2.29 for MXIM. This implies that the market is currently less bearish on the outlook for MXIM.
Rio Tinto plc (NYSE:RIO) beats Maxim Integrated Products, Inc. (NASDAQ:MXIM) on a total of 8 of the 14 factors compared between the two stocks. RIO is growing fastly, generates a higher return on investment and has lower financial risk. In terms of valuation, RIO is the cheaper of the two stocks on an earnings, book value and sales basis, RIO is more undervalued relative to its price target. Finally, BKD has better sentiment signals based on short interest.