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Abbott Laboratories (ABT) vs. Plug Power Inc. (PLUG): Which is the Better Investment?

Abbott Laboratories (NYSE:ABT) shares are up more than 6.99% this year and recently increased 0.48% or $0.29 to settle at $61.06. Plug Power Inc. (NASDAQ:PLUG), on the other hand, is down -10.17% year to date as of 05/17/2018. It currently trades at $2.12 and has returned 4.95% during the past week.

Abbott Laboratories (NYSE:ABT) and Plug Power Inc. (NASDAQ:PLUG) are the two most active stocks in the Medical Appliances & Equipment 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

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect ABT to grow earnings at a 11.86% annual rate over the next 5 years. Comparatively, PLUG is expected to grow at a 25.00% annual rate. All else equal, PLUG’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 EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. Abbott Laboratories (ABT) has an EBITDA margin of 20.86%. This suggests that ABT underlying business is more profitable ABT’s ROI is 2.20% while PLUG has a ROI of -57.40%. The interpretation is that ABT’s business generates a higher return on investment than PLUG’s.

Cash Flow



Earnings don’t always accurately reflect the amount of cash that a company brings in. ABT’s free cash flow (“FCF”) per share for the trailing twelve months was +0.19. Comparatively, PLUG’s free cash flow per share was -0.12. On a percent-of-sales basis, ABT’s free cash flow was 1.22% while PLUG converted -0.02% of its revenues into cash flow. This means that, for a given level of sales, ABT is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios are important because they reveal the financial health of a company. ABT has a current ratio of 1.70 compared to 1.30 for PLUG. This means that ABT can more easily cover its most immediate liabilities over the next twelve months. ABT’s debt-to-equity ratio is 0.70 versus a D/E of 2.03 for PLUG. PLUG is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

ABT trades at a forward P/E of 18.98, a P/B of 3.41, and a P/S of 3.76, compared to a P/B of 9.64, and a P/S of 4.66 for PLUG. 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. ABT is currently priced at a -10.94% to its one-year price target of 68.56. Comparatively, PLUG is -35.76% relative to its price target of 3.30. This suggests that PLUG 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. ABT has a beta of 1.51 and PLUG’s beta is 1.25. PLUG’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. ABT has a short ratio of 2.30 compared to a short interest of 8.72 for PLUG. This implies that the market is currently less bearish on the outlook for ABT.

Summary

Abbott Laboratories (NYSE:ABT) beats Plug Power Inc. (NASDAQ:PLUG) on a total of 10 of the 14 factors compared between the two stocks. ABT 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. In terms of valuation, ABT is the cheaper of the two stocks on book value and sales basis, Finally, ABT has better sentiment signals based on short interest.

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