Earnings

Financial Metrics You Should Care About: Johnson & Johnson (JNJ), Cognizant Technology Solutions Corporation (CTSH)

The shares of Johnson & Johnson have decreased by more than -9.78% this year alone. The shares recently went down by -0.93% or -$1.18 and now trades at $126.06. The shares of Cognizant Technology Solutions Corporation (NASDAQ:CTSH), has jumped by 6.81% year to date as of 05/14/2018. The shares currently trade at $75.86 and have been able to report a change of -2.57% over the past one week.

The stock of Johnson & Johnson and Cognizant Technology Solutions 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: 7.79% versus 13.54%

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 JNJ will grow it’s earning at a 7.79% annual rate in the next 5 years. This is in contrast to CTSH which will have a positive growth at a 13.54% annual rate. This means that the higher growth rate of CTSH 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. JNJ has an EBITDA margin of 31.82%, this implies that the underlying business of JNJ is more profitable. The ROI of JNJ is 15.70% while that of CTSH is 16.90%. These figures suggest that CTSH ventures generate a higher ROI than that of JNJ.

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, JNJ’s free cash flow per share is a positive 0.88, while that of CTSH is positive 1.19.

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 JNJ is 1.60 and that of CTSH is 3.60. This implies that it is easier for JNJ to cover its immediate obligations over the next 12 months than CTSH. The debt ratio of JNJ is 0.51 compared to 0.07 for CTSH. JNJ can be able to settle its long-term debts and thus is a lower financial risk than CTSH.

Valuation

JNJ currently trades at a forward P/E of 14.69, a P/B of 5.35, and a P/S of 4.30 while CTSH trades at a forward P/E of 14.89, a P/B of 4.05, and a P/S of 2.93. This means that looking at the earnings, book values and sales basis, JNJ 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 JNJ is currently at a -13.12% to its one-year price target of 145.10. Looking at its rival pricing, CTSH is at a -15.85% relative to its price target of 90.15.

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), JNJ is given a 2.40 while 1.90 placed for CTSH. This means that analysts are more bullish on the outlook for JNJ 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 JNJ is 2.77 while that of CTSH is just 2.40. This means that analysts are more bullish on the forecast for CTSH stock.

Conclusion

The stock of Johnson & Johnson defeats that of Cognizant Technology Solutions Corporation when the two are compared, with JNJ taking 3 out of the total factors that were been considered. JNJ 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, JNJ is the cheaper one on an earnings, book value and sales basis. Finally, the sentiment signal for JNJ is better on when it is viewed on short interest.

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