Finance

Choosing Between The Home Depot, Inc. (HD) and General Mills, Inc. (GIS)

The Home Depot, Inc. (NYSE:HD) shares are down more than -2.22% this year and recently decreased -0.56% or -$1.05 to settle at $185.33. General Mills, Inc. (NYSE:GIS), on the other hand, is down -27.80% year to date as of 05/17/2018. It currently trades at $42.81 and has returned 0.45% during the past week.

The Home Depot, Inc. (NYSE:HD) and General Mills, Inc. (NYSE:GIS) are the two most active stocks in the Home Improvement Stores industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

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 HD to grow earnings at a 16.39% annual rate over the next 5 years. Comparatively, GIS is expected to grow at a 6.23% annual rate. All else equal, HD’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 20.1% for General Mills, Inc. (GIS). HD’s ROI is 35.20% while GIS has a ROI of 13.80%. The interpretation is that HD’s business generates a higher return on investment than GIS’s.

Cash Flow



Cash is king when it comes to investing. HD’s free cash flow (“FCF”) per share for the trailing twelve months was +0.61. Comparatively, GIS’s free cash flow per share was +0.26. On a percent-of-sales basis, HD’s free cash flow was 0.71% while GIS converted 0.95% of its revenues into cash flow. This means that, for a given level of sales, GIS is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. HD has a current ratio of 1.20 compared to 0.70 for GIS. This means that HD can more easily cover its most immediate liabilities over the next twelve months. HD’s debt-to-equity ratio is 18.59 versus a D/E of 1.94 for GIS. HD is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

HD trades at a forward P/E of 18.17, a P/B of 148.26, and a P/S of 2.13, compared to a forward P/E of 13.55, a P/B of 4.94, and a P/S of 1.62 for GIS. HD is the expensive of the two stocks on an earnings, book value and sales basis. 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

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. HD is currently priced at a -12.58% to its one-year price target of 212.01. Comparatively, GIS is -13.13% relative to its price target of 49.28. This suggests that GIS is the better investment over the next year.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. HD has a beta of 1.13 and GIS’s beta is 0.76. GIS’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. HD has a short ratio of 1.93 compared to a short interest of 4.13 for GIS. This implies that the market is currently less bearish on the outlook for HD.

Summary

General Mills, Inc. (NYSE:GIS) beats The Home Depot, Inc. (NYSE:HD) on a total of 8 of the 14 factors compared between the two stocks. GIS is growing fastly, has a higher cash conversion rate and has lower financial risk. In terms of valuation, GIS is the cheaper of the two stocks on an earnings, book value and sales basis, GIS is more undervalued relative to its price target. Finally, C has better sentiment signals based on short interest.

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