Wells Fargo & Company (NYSE:WFC) shares are down more than -7.86% this year and recently decreased -1.64% or -$0.93 to settle at $55.90. Telefonaktiebolaget LM Ericsson (publ) (NASDAQ:ERIC), on the other hand, is up 0.75% year to date as of 03/16/2018. It currently trades at $6.73 and has returned -2.04% during the past week.
Wells Fargo & Company (NYSE:WFC) and Telefonaktiebolaget LM Ericsson (publ) (NASDAQ:ERIC) are the two most active stocks in the market based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
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 WFC to grow earnings at a 9.37% 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 in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. Wells Fargo & Company (WFC) has an EBITDA margin of 49.07%. This suggests that WFC underlying business is more profitable WFC’s ROI is 9.80% while ERIC has a ROI of -25.50%. The interpretation is that WFC’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. On a percent-of-sales basis, WFC’s free cash flow was 0% while ERIC converted 43.93% 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
WFC’s debt-to-equity ratio is 1.24 versus a D/E of 0.33 for ERIC. WFC is therefore the more solvent of the two companies, and has lower financial risk.
WFC trades at a forward P/E of 10.45, a P/B of 1.51, and a P/S of 4.75, compared to a forward P/E of 21.71, a P/B of 1.81, and a P/S of 0.93 for ERIC. 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. WFC is currently priced at a -13.51% to its one-year price target of 64.63. Comparatively, ERIC is 13.3% relative to its price target of 5.94. This suggests that WFC 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 2.80 for WFC and 3.20 for ERIC, which implies that analysts are more bullish on the outlook for ERIC.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. WFC has a beta of 1.06 and ERIC’s beta is 0.83. ERIC’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. WFC has a short ratio of 1.73 compared to a short interest of 5.78 for ERIC. This implies that the market is currently less bearish on the outlook for WFC.
Telefonaktiebolaget LM Ericsson (publ) (NASDAQ:ERIC) beats Wells Fargo & Company (NYSE:WFC) 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. Finally, NRG has better sentiment signals based on short interest.