Global

Dissecting the Numbers for Nokia Corporation (NOK) and TAL Education Group (TAL)

Nokia Corporation (NYSE:NOK) shares are up more than 20.39% this year and recently increased 1.63% or $0.09 to settle at $5.61. TAL Education Group (NYSE:TAL), on the other hand, is up 20.63% year to date as of 04/16/2018. It currently trades at $35.84 and has returned -0.94% during the past week.

Nokia Corporation (NYSE:NOK) and TAL Education Group (NYSE:TAL) are the two most active stocks in the Communication Equipment industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

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 NOK to grow earnings at a 17.38% annual rate over the next 5 years. Comparatively, TAL is expected to grow at a 62.30% annual rate. All else equal, TAL’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 Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. NOK’s ROI is -4.60% while TAL has a ROI of 8.40%. The interpretation is that TAL’s business generates a higher return on investment than NOK’s.

Cash Flow



The value of a stock is simply the present value of its future free cash flows. NOK’s free cash flow (“FCF”) per share for the trailing twelve months was +0.33. Comparatively, TAL’s free cash flow per share was +0.07. On a percent-of-sales basis, NOK’s free cash flow was 7.1% while TAL converted 3.29% of its revenues into cash flow. This means that, for a given level of sales, NOK is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. NOK has a current ratio of 1.60 compared to 1.10 for TAL. This means that NOK can more easily cover its most immediate liabilities over the next twelve months. NOK’s debt-to-equity ratio is 0.23 versus a D/E of 0.26 for TAL. TAL is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

NOK trades at a forward P/E of 14.50, a P/B of 1.58, and a P/S of 1.13, compared to a forward P/E of 68.92, a P/B of 19.80, and a P/S of 12.22 for TAL. NOK 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. NOK is currently priced at a -16.02% to its one-year price target of 6.68. Comparatively, TAL is -5.61% relative to its price target of 37.97. This suggests that NOK 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. NOK has a beta of 1.15 and TAL’s beta is 0.36. TAL’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. NOK has a short ratio of 1.42 compared to a short interest of 2.66 for TAL. This implies that the market is currently less bearish on the outlook for NOK.

Summary

Nokia Corporation (NYSE:NOK) beats TAL Education Group (NYSE:TAL) on a total of 9 of the 14 factors compared between the two stocks. NOK has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, NOK is the cheaper of the two stocks on an earnings, book value and sales basis, NOK is more undervalued relative to its price target. Finally, NOK has better sentiment signals based on short interest.

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