Zayo Group Holdings, Inc. (NYSE:ZAYO) shares are down more than -0.41% this year and recently decreased -2.58% or -$0.97 to settle at $36.65. H&R Block, Inc. (NYSE:HRB), on the other hand, is up 3.70% year to date as of 03/13/2018. It currently trades at $27.19 and has returned 5.51% during the past week.
Zayo Group Holdings, Inc. (NYSE:ZAYO) and H&R Block, Inc. (NYSE:HRB) 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.
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 ZAYO to grow earnings at a 40.80% annual rate over the next 5 years. Comparatively, HRB is expected to grow at a 10.00% annual rate. All else equal, ZAYO’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., compared to an EBITDA margin of 24.12% for H&R Block, Inc. (HRB). ZAYO’s ROI is 4.80% while HRB has a ROI of 35.40%. The interpretation is that HRB’s business generates a higher return on investment than ZAYO’s.
Cash is king when it comes to investing. ZAYO’s free cash flow (“FCF”) per share for the trailing twelve months was -0.02. Comparatively, HRB’s free cash flow per share was -1.59. On a percent-of-sales basis, ZAYO’s free cash flow was -0.23% while HRB converted -10.95% of its revenues into cash flow. This means that, for a given level of sales, ZAYO is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. ZAYO has a current ratio of 1.00 compared to 1.90 for HRB. This means that HRB can more easily cover its most immediate liabilities over the next twelve months.
ZAYO trades at a forward P/E of 63.85, a P/B of 6.01, and a P/S of 3.58, compared to a forward P/E of 11.63, and a P/S of 1.84 for HRB. ZAYO 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
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. ZAYO is currently priced at a -11.84% to its one-year price target of 41.57. Comparatively, HRB is -5.16% relative to its price target of 28.67. This suggests that ZAYO 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 2.10 for ZAYO and 2.80 for HRB, which implies that analysts are more bullish on the outlook for HRB.
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. ZAYO has a beta of 0.49 and HRB’s beta is 0.32. HRB’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. ZAYO has a short ratio of 7.49 compared to a short interest of 8.77 for HRB. This implies that the market is currently less bearish on the outlook for ZAYO.
H&R Block, Inc. (NYSE:HRB) beats Zayo Group Holdings, Inc. (NYSE:ZAYO) on a total of 7 of the 14 factors compared between the two stocks. HRB is growing fastly, higher liquidity and has lower financial risk. In terms of valuation, HRB is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, BUFF has better sentiment signals based on short interest.