Earnings

Comparing Stein Mart, Inc. (SMRT) and Houghton Mifflin Harcourt Company (HMHC)

Stein Mart, Inc. (NASDAQ:SMRT) shares are up more than 19.83% this year and recently decreased -8.55% or -$0.13 to settle at $1.39. Houghton Mifflin Harcourt Company (NASDAQ:HMHC), on the other hand, is down -31.72% year to date as of 04/02/2018. It currently trades at $6.35 and has returned -11.81% during the past week.

Stein Mart, Inc. (NASDAQ:SMRT) and Houghton Mifflin Harcourt Company (NASDAQ:HMHC) are the two most active stocks in the Apparel Stores industry 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.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect SMRT to grow earnings at a 17.00% annual rate over the next 5 years. Comparatively, HMHC is expected to grow at a 5.00% annual rate. All else equal, SMRT’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. EBITDA margin of 12.21% for Houghton Mifflin Harcourt Company (HMHC). SMRT’s ROI is 1.70% while HMHC has a ROI of -8.60%. The interpretation is that SMRT’s business generates a higher return on investment than HMHC’s.

Cash Flow



Earnings don’t always accurately reflect the amount of cash that a company brings in. SMRT’s free cash flow (“FCF”) per share for the trailing twelve months was -0.20. Comparatively, HMHC’s free cash flow per share was +0.65. On a percent-of-sales basis, SMRT’s free cash flow was -0.73% while HMHC converted 5.7% of its revenues into cash flow. This means that, for a given level of sales, HMHC 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. SMRT has a current ratio of 1.40 compared to 1.20 for HMHC. This means that SMRT can more easily cover its most immediate liabilities over the next twelve months. SMRT’s debt-to-equity ratio is 3.19 versus a D/E of 0.97 for HMHC. SMRT is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

SMRT trades at a P/B of 1.36, and a P/S of 0.04, compared to a P/B of 0.98, and a P/S of 0.57 for HMHC. SMRT is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. 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. SMRT is currently priced at a -30.5% to its one-year price target of 2.00. Comparatively, HMHC is -40.93% relative to its price target of 10.75. This suggests that HMHC is the better investment over the next year.
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. SMRT has a beta of -0.87 and HMHC’s beta is 0.55. SMRT’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. SMRT has a short ratio of 3.14 compared to a short interest of 6.69 for HMHC. This implies that the market is currently less bearish on the outlook for SMRT.

Summary

Houghton Mifflin Harcourt Company (NASDAQ:HMHC) beats Stein Mart, Inc. (NASDAQ:SMRT) on a total of 7 of the 14 factors compared between the two stocks. HMHC is growing fastly, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. HMHC is more undervalued relative to its price target. Finally, AKG has better sentiment signals based on short interest.

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