Global

Choosing Between AK Steel Holding Corporation (AKS) and LendingClub Corporation (LC)

AK Steel Holding Corporation (NYSE:AKS) shares are down more than -19.96% this year and recently increased 1.34% or $0.06 to settle at $4.53. LendingClub Corporation (NYSE:LC), on the other hand, is down -18.89% year to date as of 04/16/2018. It currently trades at $3.35 and has returned 0.30% during the past week.

AK Steel Holding Corporation (NYSE:AKS) and LendingClub Corporation (NYSE:LC) are the two most active stocks in the Steel & Iron 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

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 AKS to grow earnings at a 22.87% annual rate over the next 5 years. Comparatively, LC is expected to grow at a -8.60% annual rate. All else equal, AKS’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. AK Steel Holding Corporation (AKS) has an EBITDA margin of 9.44%. This suggests that AKS underlying business is more profitable AKS’s ROI is 14.20% while LC has a ROI of -4.90%. The interpretation is that AKS’s business generates a higher return on investment than LC’s.

Cash Flow



Cash is king when it comes to investing. AKS’s free cash flow (“FCF”) per share for the trailing twelve months was -0.06. Comparatively, LC’s free cash flow per share was -1.06. On a percent-of-sales basis, AKS’s free cash flow was -0.31% while LC converted -37.59% of its revenues into cash flow. This means that, for a given level of sales, AKS is able to generate more free cash flow for investors.

Valuation

AKS trades at a forward P/E of 5.06, and a P/S of 0.24, compared to a forward P/E of 18.11, a P/B of 1.51, and a P/S of 1.22 for LC. AKS 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

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. AKS is currently priced at a -26.82% to its one-year price target of 6.19. Comparatively, LC is -34.18% relative to its price target of 5.09. This suggests that LC is the better investment over the next year.

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. AKS has a beta of 2.88 and LC’s beta is 1.22. LC’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. AKS has a short ratio of 4.20 compared to a short interest of 4.19 for LC. This implies that the market is currently less bearish on the outlook for LC.

Summary




AK Steel Holding Corporation (NYSE:AKS) beats LendingClub Corporation (NYSE:LC) on a total of 10 of the 14 factors compared between the two stocks. AKS 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, AKS is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, DVN has better sentiment signals based on short interest.

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