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Critical Comparison: Facebook, Inc. (FB) vs. Ensco plc (ESV)

Facebook, Inc. (NASDAQ:FB) shares are down more than -6.59% this year and recently increased 0.19% or $0.31 to settle at $164.83. Ensco plc (NYSE:ESV), on the other hand, is down -6.60% year to date as of 04/16/2018. It currently trades at $5.52 and has returned 17.95% during the past week.

Facebook, Inc. (NASDAQ:FB) and Ensco plc (NYSE:ESV) are the two most active stocks in the Internet Information Providers industry 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.

Growth

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect FB to grow earnings at a 26.12% annual rate over the next 5 years.

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. , compared to an EBITDA margin of 25.13% for Ensco plc (ESV). FB’s ROI is 24.00% while ESV has a ROI of -1.70%. The interpretation is that FB’s business generates a higher return on investment than ESV’s.

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. FB’s free cash flow (“FCF”) per share for the trailing twelve months was +1.83. Comparatively, ESV’s free cash flow per share was -0.03. On a percent-of-sales basis, FB’s free cash flow was 13.08% while ESV converted -0.71% of its revenues into cash flow. This means that, for a given level of sales, FB 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. FB has a current ratio of 12.90 compared to 2.10 for ESV. This means that FB can more easily cover its most immediate liabilities over the next twelve months. FB’s debt-to-equity ratio is 0.00 versus a D/E of 0.54 for ESV. ESV is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

FB trades at a forward P/E of 18.80, a P/B of 6.45, and a P/S of 11.73, compared to a P/B of 0.27, and a P/S of 1.26 for ESV. FB 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

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. FB is currently priced at a -24.34% to its one-year price target of 217.85. Comparatively, ESV is -12.66% relative to its price target of 6.32. This suggests that FB 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. FB has a beta of 0.80 and ESV’s beta is 1.87. FB’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. FB has a short ratio of 0.60 compared to a short interest of 7.14 for ESV. This implies that the market is currently less bearish on the outlook for FB.

Summary

Facebook, Inc. (NASDAQ:FB) beats Ensco plc (NYSE:ESV) on a total of 11 of the 14 factors compared between the two stocks. FB 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. FB is more undervalued relative to its price target. Finally, FB has better sentiment signals based on short interest.

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