Time Warner Inc. (NYSE:TWX) shares are up more than 5.13% this year and recently decreased -0.61% or -$0.59 to settle at $96.16. Moelis & Company (NYSE:MC), on the other hand, is up 11.32% year to date as of 03/13/2018. It currently trades at $52.50 and has returned 1.06% during the past week.
Time Warner Inc. (NYSE:TWX) and Moelis & Company (NYSE:MC) 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 TWX to grow earnings at a 9.98% annual rate over the next 5 years. Comparatively, MC is expected to grow at a 14.60% annual rate. All else equal, MC’s higher growth rate would imply a greater potential for capital appreciation.
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., compared to an EBITDA margin of 51.07% for Moelis & Company (MC). TWX’s ROI is 12.20% while MC has a ROI of 37.40%. The interpretation is that MC’s business generates a higher return on investment than TWX’s.
If there’s one thing investors care more about than earnings, it’s cash flow. TWX’s free cash flow (“FCF”) per share for the trailing twelve months was +0.66. Comparatively, MC’s free cash flow per share was -. On a percent-of-sales basis, TWX’s free cash flow was 1.65% while MC converted 0% of its revenues into cash flow. This means that, for a given level of sales, TWX is able to generate more free cash flow for investors.
Liquidity and Financial Risk
TWX’s debt-to-equity ratio is 0.84 versus a D/E of 0.00 for MC. TWX is therefore the more solvent of the two companies, and has lower financial risk.
TWX trades at a forward P/E of 11.78, a P/B of 2.64, and a P/S of 2.40, compared to a forward P/E of 18.11, a P/B of 5.67, and a P/S of 3.99 for MC. TWX 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
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. TWX is currently priced at a -8.71% to its one-year price target of 105.34. Comparatively, MC is -5.96% relative to its price target of 55.83. This suggests that TWX 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 2.40 for TWX and 2.20 for MC, which implies that analysts are more bullish on the outlook for TWX.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. TWX has a beta of 0.91 and MC’s beta is 1.75. TWX’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. TWX has a short ratio of 2.67 compared to a short interest of 4.16 for MC. This implies that the market is currently less bearish on the outlook for TWX.
Time Warner Inc. (NYSE:TWX) beats Moelis & Company (NYSE:MC) on a total of 9 of the 14 factors compared between the two stocks. TWX has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, TWX is the cheaper of the two stocks on an earnings, book value and sales basis, TWX is more undervalued relative to its price target. Finally, TWX has better sentiment signals based on short interest.