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Critical Comparison: Microsoft Corporation (MSFT) vs. Envision Healthcare Corporation (EVHC)

Microsoft Corporation (NASDAQ:MSFT) shares are up more than 10.09% this year and recently increased 1.17% or $1.09 to settle at $94.17. Envision Healthcare Corporation (NYSE:EVHC), on the other hand, is up 10.33% year to date as of 04/16/2018. It currently trades at $38.13 and has returned -1.40% during the past week.

Microsoft Corporation (NASDAQ:MSFT) and Envision Healthcare Corporation (NYSE:EVHC) are the two most active stocks in the Business Software & Services 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

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 MSFT to grow earnings at a 11.07% annual rate over the next 5 years. Comparatively, EVHC is expected to grow at a 16.86% annual rate. All else equal, EVHC’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. , compared to an EBITDA margin of 2.78% for Envision Healthcare Corporation (EVHC). MSFT’s ROI is 11.70% while EVHC has a ROI of 0.70%. The interpretation is that MSFT’s business generates a higher return on investment than EVHC’s.

Cash Flow



The amount of free cash flow available to investors is ultimately what determines the value of a stock. MSFT’s free cash flow (“FCF”) per share for the trailing twelve months was +0.27. Comparatively, EVHC’s free cash flow per share was +0.48. On a percent-of-sales basis, MSFT’s free cash flow was 2.31% while EVHC converted 0.74% of its revenues into cash flow. This means that, for a given level of sales, MSFT 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. MSFT has a current ratio of 2.90 compared to 3.40 for EVHC. This means that EVHC can more easily cover its most immediate liabilities over the next twelve months. MSFT’s debt-to-equity ratio is 1.14 versus a D/E of 0.97 for EVHC. MSFT is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

MSFT trades at a forward P/E of 24.04, a P/B of 9.27, and a P/S of 7.37, compared to a forward P/E of 9.41, a P/B of 0.70, and a P/S of 0.60 for EVHC. MSFT 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. MSFT is currently priced at a -10.49% to its one-year price target of 105.21. Comparatively, EVHC is -15.6% relative to its price target of 45.18. This suggests that EVHC 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. MSFT has a beta of 1.04 and EVHC’s beta is 0.42. EVHC’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. MSFT has a short ratio of 1.48 compared to a short interest of 9.44 for EVHC. This implies that the market is currently less bearish on the outlook for MSFT.

Summary

Envision Healthcare Corporation (NYSE:EVHC) beats Microsoft Corporation (NASDAQ:MSFT) on a total of 9 of the 14 factors compared between the two stocks. EVHC is more profitable, has higher cash flow per share, higher liquidity and has lower financial risk. In terms of valuation, EVHC is the cheaper of the two stocks on an earnings, book value and sales basis, EVHC is more undervalued relative to its price target. Finally, NEM has better sentiment signals based on short interest.

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