Global

Comparing Avon Products, Inc. (AVP) and Adobe Systems Incorporated (ADBE)

Adobe Systems Incorporated (NASDAQ:ADBE), on the other hand, is up 29.26% year to date as of 04/16/2018. It currently trades at $226.52 and has returned 3.35% during the past week.

Avon Products, Inc. (NYSE:AVP) and Adobe Systems Incorporated (NASDAQ:ADBE) are the two most active stocks in the Personal Products industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

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. Comparatively, ADBE is expected to grow at a 26.10% annual rate. All else equal, ADBE’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 36.08% for Adobe Systems Incorporated (ADBE). AVP’s ROI is 12.60% while ADBE has a ROI of 16.70%. The interpretation is that ADBE’s business generates a higher return on investment than AVP’s.

Cash Flow



Cash is king when it comes to investing. AVP’s free cash flow (“FCF”) per share for the trailing twelve months was +0.52. Comparatively, ADBE’s free cash flow per share was +1.79. On a percent-of-sales basis, AVP’s free cash flow was 4.01% while ADBE converted 12.07% of its revenues into cash flow. This means that, for a given level of sales, ADBE 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. AVP has a current ratio of 1.40 compared to 2.10 for ADBE. This means that ADBE can more easily cover its most immediate liabilities over the next twelve months.

Valuation

AVP trades at a forward P/E of 9.26, and a P/S of 0.21, compared to a forward P/E of 30.94, a P/B of 12.91, and a P/S of 14.68 for ADBE. AVP 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

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. AVP is currently priced at a 1.47% to its one-year price target of 2.73. Comparatively, ADBE is -8.73% relative to its price target of 248.19. This suggests that ADBE 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. AVP has a beta of 1.43 and ADBE’s beta is 1.04. ADBE’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. AVP has a short ratio of 3.68 compared to a short interest of 1.67 for ADBE. This implies that the market is currently less bearish on the outlook for ADBE.

Summary

Adobe Systems Incorporated (NASDAQ:ADBE) beats Avon Products, Inc. (NYSE:AVP) on a total of 10 of the 14 factors compared between the two stocks. ADBE has lower financial risk, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, AVP is the cheaper of the two stocks on an earnings, book value and sales basis, ADBE is more undervalued relative to its price target. Finally, ADBE has better sentiment signals based on short interest.

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