Altria Group, Inc. (NYSE:MO) shares are down more than -22.57% this year and recently increased 0.77% or $0.42 to settle at $55.29. The Charles Schwab Corporation (NYSE:SCHW), on the other hand, is up 15.48% year to date as of 05/17/2018. It currently trades at $59.32 and has returned 0.54% during the past week.
Altria Group, Inc. (NYSE:MO) and The Charles Schwab Corporation (NYSE:SCHW) are the two most active stocks in the Cigarettes industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.Growth
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect MO to grow earnings at a 9.99% annual rate over the next 5 years. Comparatively, SCHW is expected to grow at a 27.73% annual rate. All else equal, SCHW’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 96.6% for The Charles Schwab Corporation (SCHW). MO’s ROI is 24.00% while SCHW has a ROI of 1.20%. The interpretation is that MO’s business generates a higher return on investment than SCHW’s.Cash Flow
If there’s one thing investors care more about than earnings, it’s cash flow. MO’s free cash flow (“FCF”) per share for the trailing twelve months was +0.80. Comparatively, SCHW’s free cash flow per share was -0.70. On a percent-of-sales basis, MO’s free cash flow was 5.92% while SCHW converted -10.95% of its revenues into cash flow. This means that, for a given level of sales, MO is able to generate more free cash flow for investors.Liquidity and Financial Risk
MO’s debt-to-equity ratio is 0.90 versus a D/E of 11.75 for SCHW. SCHW is therefore the more solvent of the two companies, and has lower financial risk.
MO trades at a forward P/E of 12.72, a P/B of 6.82, and a P/S of 4.14, compared to a forward P/E of 20.60, a P/B of 4.83, and a P/S of 8.42 for SCHW. 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. MO is currently priced at a -26.05% to its one-year price target of 74.77. Comparatively, SCHW is -1.95% relative to its price target of 60.50. This suggests that MO is the better investment over the next year.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. MO has a beta of 0.66 and SCHW’s beta is 1.52. MO’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. MO has a short ratio of 2.25 compared to a short interest of 3.33 for SCHW. This implies that the market is currently less bearish on the outlook for MO.Summary
Altria Group, Inc. (NYSE:MO) beats The Charles Schwab Corporation (NYSE:SCHW) on a total of 11 of the 14 factors compared between the two stocks. MO 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, MO is the cheaper of the two stocks on an earnings and sales basis, MO is more undervalued relative to its price target. Finally, MO has better sentiment signals based on short interest.