Dollar General Corporation (NYSE:DG) shares are down more than -3.74% this year and recently increased 1.04% or $0.92 to settle at $89.53. Vodafone Group Plc (NASDAQ:VOD), on the other hand, is down -10.22% year to date as of 03/13/2018. It currently trades at $28.64 and has returned 0.28% during the past week.
Dollar General Corporation (NYSE:DG) and Vodafone Group Plc (NASDAQ:VOD) are the two most active stocks in the market based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect DG to grow earnings at a 9.03% annual rate over the next 5 years. Comparatively, VOD is expected to grow at a 12.00% annual rate. All else equal, VOD’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. Dollar General Corporation (DG) has an EBITDA margin of 10.52%. This suggests that DG underlying business is more profitable DG’s ROI is 15.70% while VOD has a ROI of -0.90%. The interpretation is that DG’s business generates a higher return on investment than VOD’s.
The value of a stock is simply the present value of its future free cash flows. DG’s free cash flow (“FCF”) per share for the trailing twelve months was +0.41. Comparatively, VOD’s free cash flow per share was -. On a percent-of-sales basis, DG’s free cash flow was 0.51% while VOD converted 0% of its revenues into cash flow. This means that, for a given level of sales, DG is able to generate more free cash flow for investors.
DG trades at a forward P/E of 15.94, a P/B of 4.25, and a P/S of 1.04, compared to a forward P/E of 24.84, a P/B of 0.95, and a P/S of 1.32 for VOD. 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. DG is currently priced at a -15.78% to its one-year price target of 106.30. Comparatively, VOD is -23.13% relative to its price target of 37.26. This suggests that VOD 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 2.20 for DG and 1.00 for VOD, which implies that analysts are more bullish on the outlook for DG.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. DG has a beta of 1.03 and VOD’s beta is 0.87. VOD’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.DG has a short ratio of 2.74 compared to a short interest of 2.60 for VOD. This implies that the market is currently less bearish on the outlook for VOD.
Vodafone Group Plc (NASDAQ:VOD) beats Dollar General Corporation (NYSE:DG) on a total of 7 of the 14 factors compared between the two stocks. VOD is more profitable and has lower financial risk. VOD is more undervalued relative to its price target. Finally, VOD has better sentiment signals based on short interest.