American Airlines Group Inc. (NASDAQ:AAL) shares are down more than -16.14% this year and recently decreased -0.98% or -$0.43 to settle at $43.63. McDonald’s Corporation (NYSE:MCD), on the other hand, is down -6.28% year to date as of 05/17/2018. It currently trades at $161.31 and has returned -2.28% during the past week.
American Airlines Group Inc. (NASDAQ:AAL) and McDonald’s Corporation (NYSE:MCD) are the two most active stocks in the Major Airlines 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
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect AAL to grow earnings at a 11.51% annual rate over the next 5 years. Comparatively, MCD is expected to grow at a 8.55% annual rate. All else equal, AAL’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 47.58% for McDonald’s Corporation (MCD). AAL’s ROI is 15.30% while MCD has a ROI of 26.20%. The interpretation is that MCD’s business generates a higher return on investment than AAL’s.Cash Flow
Cash is king when it comes to investing. AAL’s free cash flow (“FCF”) per share for the trailing twelve months was +2.05. Comparatively, MCD’s free cash flow per share was +0.37. On a percent-of-sales basis, AAL’s free cash flow was 2.27% while MCD converted 1.27% of its revenues into cash flow. This means that, for a given level of sales, AAL is able to generate more free cash flow for investors.Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. AAL has a current ratio of 0.60 compared to 1.70 for MCD. This means that MCD can more easily cover its most immediate liabilities over the next twelve months.Valuation
AAL trades at a forward P/E of 6.74, and a P/S of 0.48, compared to a forward P/E of 19.49, and a P/S of 5.73 for MCD. 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. AAL is currently priced at a -27.15% to its one-year price target of 59.89. Comparatively, MCD is -13.59% relative to its price target of 186.69. This suggests that AAL 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. AAL has a beta of 0.96 and MCD’s beta is 0.63. MCD’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. AAL has a short ratio of 4.76 compared to a short interest of 1.85 for MCD. This implies that the market is currently less bearish on the outlook for MCD.Summary
McDonald’s Corporation (NYSE:MCD) beats American Airlines Group Inc. (NASDAQ:AAL) on a total of 6 of the 13 factors compared between the two stocks. MCD is growing fastly, generates a higher return on investment, higher liquidity and has lower financial risk. Finally, MCD has better sentiment signals based on short interest.