Mastercard Incorporated (NYSE:MA) shares are up more than 19.30% this year and recently decreased -1.08% or -$1.97 to settle at $180.58. Foot Locker, Inc. (NYSE:FL), on the other hand, is down -6.53% year to date as of 03/19/2018. It currently trades at $43.82 and has returned 1.15% during the past week.
Mastercard Incorporated (NYSE:MA) and Foot Locker, Inc. (NYSE:FL) 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 MA to grow earnings at a 20.34% annual rate over the next 5 years. Comparatively, FL is expected to grow at a 6.72% annual rate. All else equal, MA’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., compared to an EBITDA margin of 12.32% for Foot Locker, Inc. (FL). MA’s ROI is 44.00% while FL has a ROI of 23.50%. The interpretation is that MA’s business generates a higher return on investment than FL’s.
If there’s one thing investors care more about than earnings, it’s cash flow. MA’s free cash flow (“FCF”) per share for the trailing twelve months was +1.36. Comparatively, FL’s free cash flow per share was -. On a percent-of-sales basis, MA’s free cash flow was 11.44% while FL converted 0% of its revenues into cash flow. This means that, for a given level of sales, MA is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. MA has a current ratio of 1.60 compared to 4.40 for FL. This means that FL can more easily cover its most immediate liabilities over the next twelve months. MA’s debt-to-equity ratio is 0.99 versus a D/E of 0.05 for FL. MA is therefore the more solvent of the two companies, and has lower financial risk.
MA trades at a forward P/E of 25.61, a P/B of 34.86, and a P/S of 15.06, compared to a forward P/E of 9.12, a P/B of 2.08, and a P/S of 0.67 for FL. MA 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. MA is currently priced at a -7.25% to its one-year price target of 194.70. Comparatively, FL is -15.08% relative to its price target of 51.60. This suggests that FL 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 1.70 for MA and 2.10 for FL, which implies that analysts are more bullish on the outlook for FL.
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. MA has a beta of 1.18 and FL’s beta is 0.84. FL’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. MA has a short ratio of 1.94 compared to a short interest of 0.00 for FL. This implies that the market is currently less bearish on the outlook for FL.
Foot Locker, Inc. (NYSE:FL) beats Mastercard Incorporated (NYSE:MA) on a total of 8 of the 14 factors compared between the two stocks. FL is growing fastly and has lower financial risk. In terms of valuation, FL is the cheaper of the two stocks on an earnings, book value and sales basis, FL is more undervalued relative to its price target. Finally, FL has better sentiment signals based on short interest.