Earnings

Critical Comparison: TAL Education Group (TAL) vs. CF Industries Holdings, Inc. (CF)

 

TAL Education Group (NYSE:TAL) shares are up more than 28.98% this year and recently decreased -1.67% or -$0.65 to settle at $38.32. CF Industries Holdings, Inc. (NYSE:CF), on the other hand, is down -9.90% year to date as of 03/16/2018. It currently trades at $38.33 and has returned -7.64% during the past week.

TAL Education Group (NYSE:TAL) and CF Industries Holdings, Inc. (NYSE:CF) 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.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect TAL to grow earnings at a 62.30% annual rate over the next 5 years. Comparatively, CF is expected to grow at a 58.44% annual rate. All else equal, TAL’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. EBITDA margin of 25.69% for CF Industries Holdings, Inc. (CF). TAL’s ROI is 8.40% while CF has a ROI of 15.00%. The interpretation is that CF’s business generates a higher return on investment than TAL’s.

Cash Flow 




The amount of free cash flow available to investors is ultimately what determines the value of a stock. TAL’s free cash flow (“FCF”) per share for the trailing twelve months was +0.07. Comparatively, CF’s free cash flow per share was -0.10. On a percent-of-sales basis, TAL’s free cash flow was 3.29% while CF converted -0.56% of its revenues into cash flow. This means that, for a given level of sales, TAL is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. TAL has a current ratio of 1.10 compared to 2.50 for CF. This means that CF can more easily cover its most immediate liabilities over the next twelve months. TAL’s debt-to-equity ratio is 0.26 versus a D/E of 0.00 for CF. TAL is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

TAL trades at a forward P/E of 73.69, a P/B of 21.17, and a P/S of 12.74, compared to a forward P/E of 22.02, a P/B of 2.51, and a P/S of 2.20 for CF. TAL 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

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. TAL is currently priced at a 1.62% to its one-year price target of 37.71. Comparatively, CF is -9.98% relative to its price target of 42.58. This suggests that CF 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 1.80 for TAL and 2.80 for CF, which implies that analysts are more bullish on the outlook for CF.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. TAL has a beta of 0.30 and CF’s beta is 1.04. TAL’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. TAL has a short ratio of 2.54 compared to a short interest of 4.49 for CF. This implies that the market is currently less bearish on the outlook for TAL.

Summary

CF Industries Holdings, Inc. (NYSE:CF) beats TAL Education Group (NYSE:TAL) on a total of 8 of the 14 factors compared between the two stocks. CF is growing fastly, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, CF is the cheaper of the two stocks on an earnings, book value and sales basis, CF is more undervalued relative to its price target. Finally, NRG has better sentiment signals based on short interest.

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