Earnings

Financially Devastating or Fantastic? – Omnicom Group Inc. (OMC), Costco Wholesale Corporation (COST)

The shares of Omnicom Group Inc. have increased by more than 1.65% this year alone. The shares recently went up by 3.02% or $2.17 and now trades at $74.03. The shares of Costco Wholesale Corporation (NASDAQ:COST), has jumped by 4.55% year to date as of 04/16/2018. The shares currently trade at $194.58 and have been able to report a change of 5.51% over the past one week.

The stock of Omnicom Group Inc. and Costco Wholesale Corporation were two of the most active stocks on Monday. Investors seem to be very interested in what happens to the stocks of these two companies but do investors favor one over the other? We will analyze the growth, profitability, risk, valuation, and insider trends of both companies and see which one investors prefer.

Next 5Y EPS Growth: 7.75% versus 11.74%

When a company is able to grow consistently in terms of earnings at a high compound rate have the highest likelihood of creating value for its shareholders over time. Analysts have predicted that OMC will grow it’s earning at a 7.75% annual rate in the next 5 years. This is in contrast to COST which will have a positive growth at a 11.74% annual rate. This means that the higher growth rate of COST implies a greater potential for capital appreciation over the years.

Profitability and Returns

Growth alone cannot be used to see if the company will be valuable. Shareholders will be the losers if a company invest in ventures that aren’t profitable enough to support upbeat growth. In order for us to accurately measure profitability and return, we will be using the EBITDA margin and Return on Investment (ROI), which balances the difference in capital structure. OMC has an EBITDA margin of 15.57%, this implies that the underlying business of OMC is more profitable. The ROI of OMC is 19.50% while that of COST is 16.00%. These figures suggest that OMC ventures generate a higher ROI than that of COST.

Cash Flow



The value of a stock is ultimately determined by the amount of cash flow that the investors have available. Over the last 12 months, OMC’s free cash flow per share is a positive 13.01, while that of COST is negative -0.48.

Liquidity and Financial Risk

The ability of a company to meet up with its short-term obligations and be able to clear its longer-term debts is measured using Liquidity and leverage ratios. The current ratio for OMC is 0.90 and that of COST is 1.00. This implies that it is easier for OMC to cover its immediate obligations over the next 12 months than COST. The debt ratio of OMC is 1.88 compared to 0.00 for COST. OMC can be able to settle its long-term debts and thus is a lower financial risk than COST.

Valuation

OMC currently trades at a forward P/E of 12.39, a P/B of 6.55, and a P/S of 1.11 while COST trades at a forward P/E of 25.32, a P/B of 7.27, and a P/S of 0.63. This means that looking at the earnings, book values and sales basis, OMC is the cheaper one. It is very obvious that earnings are the most important factors to investors, thus analysts are most likely to place their bet on the P/E.

Analyst Price Targets and Opinions




The mistake some people make is that they think a cheap stock has more value to it. In order to know the value of a stock, there is need to compare its current price to its likely trading price in the future. The price of OMC is currently at a -7.62% to its one-year price target of 80.14. Looking at its rival pricing, COST is at a -7.1% relative to its price target of 209.46.

When looking at the investment recommendation on say a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell), OMC is given a 2.90 while 2.00 placed for COST. This means that analysts are more bullish on the outlook for OMC stocks.

Insider Activity and Investor Sentiment

Short interest or otherwise called the percentage of a stock’s tradable shares currently being shorted is another data that investors use to get a handle on sentiment. The short ratio for OMC is 10.63 while that of COST is just 2.87. This means that analysts are more bullish on the forecast for COST stock.

Conclusion

The stock of Omnicom Group Inc. defeats that of Costco Wholesale Corporation when the two are compared, with OMC taking 7 out of the total factors that were been considered. OMC happens to be more profitable, generates a higher ROI, has higher cash flow per share, higher liquidity and has a lower financial risk. When looking at the stock valuation, OMC is the cheaper one on an earnings, book value and sales basis. Finally, the sentiment signal for OMC is better on when it is viewed on short interest.

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