Applied Materials, Inc. (NASDAQ:AMAT) shares are up more than 11.25% this year and recently increased 1.43% or $0.8 to settle at $56.87. Worldpay, Inc. (NYSE:WP), on the other hand, is up 10.89% year to date as of 04/16/2018. It currently trades at $81.56 and has returned 1.94% during the past week.
Applied Materials, Inc. (NASDAQ:AMAT) and Worldpay, Inc. (NYSE:WP) are the two most active stocks in the Semiconductor Equipment & Materials industry 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.Growth
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 AMAT to grow earnings at a 18.88% annual rate over the next 5 years. Comparatively, WP is expected to grow at a 17.08% annual rate. All else equal, AMAT’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. Applied Materials, Inc. (AMAT) has an EBITDA margin of 30.85%. This suggests that AMAT underlying business is more profitable AMAT’s ROI is 24.40% while WP has a ROI of -1.80%. The interpretation is that AMAT’s business generates a higher return on investment than WP’s.Cash Flow
Earnings don’t always accurately reflect the amount of cash that a company brings in. On a percent-of-sales basis, AMAT’s free cash flow was 7.8% while WP converted 0% of its revenues into cash flow. This means that, for a given level of sales, AMAT is able to generate more free cash flow for investors.Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. AMAT has a current ratio of 3.00 compared to 0.70 for WP. This means that AMAT can more easily cover its most immediate liabilities over the next twelve months. AMAT’s debt-to-equity ratio is 0.00 versus a D/E of 10.72 for WP. WP is therefore the more solvent of the two companies, and has lower financial risk.Valuation
AMAT trades at a forward P/E of 12.24, a P/B of 7.06, and a P/S of 3.89, compared to a forward P/E of 18.21, a P/B of 24.72, and a P/S of 6.39 for WP. AMAT is the cheaper 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. AMAT is currently priced at a -19.03% to its one-year price target of 70.24. Comparatively, WP is -10.97% relative to its price target of 91.61. This suggests that AMAT is the better investment over the next year.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. AMAT has a beta of 1.61 and WP’s beta is 0.60. WP’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. AMAT has a short ratio of 0.91 compared to a short interest of 2.91 for WP. This implies that the market is currently less bearish on the outlook for AMAT.Summary
Applied Materials, Inc. (NASDAQ:AMAT) beats Worldpay, Inc. (NYSE:WP) on a total of 13 of the 14 factors compared between the two stocks. AMAT is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, AMAT is the cheaper of the two stocks on an earnings, book value and sales basis, AMAT is more undervalued relative to its price target. Finally, AMAT has better sentiment signals based on short interest.