UnitedHealth Group Incorporated (NYSE:UNH) shares are up more than 2.94% this year and recently increased 1.87% or $4.17 to settle at $226.94. Telefonaktiebolaget LM Ericsson (publ) (NASDAQ:ERIC), on the other hand, is up 1.05% year to date as of 03/13/2018. It currently trades at $6.75 and has returned -0.59% during the past week.
UnitedHealth Group Incorporated (NYSE:UNH) and Telefonaktiebolaget LM Ericsson (publ) (NASDAQ:ERIC) 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.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect UNH to grow earnings at a 15.62% annual rate over the next 5 years. Comparatively, ERIC is expected to grow at a 16.86% annual rate. All else equal, ERIC’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. UnitedHealth Group Incorporated (UNH) has an EBITDA margin of 8.68%. This suggests that UNH underlying business is more profitable UNH’s ROI is 13.60% while ERIC has a ROI of -25.50%. The interpretation is that UNH’s business generates a higher return on investment than ERIC’s.
If there’s one thing investors care more about than earnings, it’s cash flow. UNH’s free cash flow (“FCF”) per share for the trailing twelve months was -3.97. Comparatively, ERIC’s free cash flow per share was +3.06. On a percent-of-sales basis, UNH’s free cash flow was -1.91% while ERIC converted 43.22% of its revenues into cash flow. This means that, for a given level of sales, ERIC is able to generate more free cash flow for investors.
Liquidity and Financial Risk
UNH’s debt-to-equity ratio is 0.66 versus a D/E of 0.33 for ERIC. UNH is therefore the more solvent of the two companies, and has lower financial risk.
UNH trades at a forward P/E of 16.09, a P/B of 4.61, and a P/S of 1.09, compared to a forward P/E of 22.50, a P/B of 1.84, and a P/S of 0.92 for ERIC. UNH 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
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”. UNH is currently priced at a -16.3% to its one-year price target of 271.14. Comparatively, ERIC is 13.64% relative to its price target of 5.94. This suggests that UNH 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 1.50 for UNH and 3.20 for ERIC, which implies that analysts are more bullish on the outlook for ERIC.
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. UNH has a beta of 0.73 and ERIC’s beta is 0.82. UNH’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.UNH has a short ratio of 2.25 compared to a short interest of 5.89 for ERIC. This implies that the market is currently less bearish on the outlook for UNH.
Telefonaktiebolaget LM Ericsson (publ) (NASDAQ:ERIC) beats UnitedHealth Group Incorporated (NYSE:UNH) on a total of 7 of the 14 factors compared between the two stocks. ERIC is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, ERIC is the cheaper of the two stocks on book value and sales basis, Finally, BUFF has better sentiment signals based on short interest.