Micron Technology, Inc. (NASDAQ:MU) shares are up more than 25.61% this year and recently decreased -1.11% or -$0.58 to settle at $51.65. Gerdau S.A. (NYSE:GGB), on the other hand, is up 27.69% year to date as of 04/16/2018. It currently trades at $4.75 and has returned 4.17% during the past week.
Micron Technology, Inc. (NASDAQ:MU) and Gerdau S.A. (NYSE:GGB) are the two most active stocks in the Semiconductor- Memory Chips industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.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 MU to grow earnings at a 30.33% annual rate over the next 5 years. Comparatively, GGB is expected to grow at a 25.43% annual rate. All else equal, MU’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. Micron Technology, Inc. (MU) has an EBITDA margin of 50.95%. This suggests that MU underlying business is more profitable MU’s ROI is 19.20% while GGB has a ROI of 1.90%. The interpretation is that MU’s business generates a higher return on investment than GGB’s.Cash Flow
Earnings don’t always accurately reflect the amount of cash that a company brings in. MU’s free cash flow (“FCF”) per share for the trailing twelve months was +1.69. Comparatively, GGB’s free cash flow per share was +0.43. On a percent-of-sales basis, MU’s free cash flow was 9.65% while GGB converted 6.4% of its revenues into cash flow. This means that, for a given level of sales, MU is able to generate more free cash flow for investors.Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. MU has a current ratio of 2.60 compared to 2.30 for GGB. This means that MU can more easily cover its most immediate liabilities over the next twelve months. MU’s debt-to-equity ratio is 0.36 versus a D/E of 0.75 for GGB. GGB is therefore the more solvent of the two companies, and has lower financial risk.Valuation
MU trades at a forward P/E of 5.24, a P/B of 2.32, and a P/S of 2.33, compared to a forward P/E of 10.80, a P/B of 1.17, and a P/S of 0.73 for GGB. MU is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S ratio. 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. MU is currently priced at a -28.97% to its one-year price target of 72.72. Comparatively, GGB is -26.58% relative to its price target of 6.47. This suggests that MU is the better investment over the next year.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. MU has a beta of 1.33 and GGB’s beta is 2.32. MU’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. MU has a short ratio of 1.15 compared to a short interest of 4.32 for GGB. This implies that the market is currently less bearish on the outlook for MU.Summary
Micron Technology, Inc. (NASDAQ:MU) beats Gerdau S.A. (NYSE:GGB) on a total of 11 of the 14 factors compared between the two stocks. MU 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. MU is more undervalued relative to its price target. Finally, MU has better sentiment signals based on short interest.