Finance

Comparing The Kraft Heinz Company (KHC) and The Progressive Corporation (PGR)

The Kraft Heinz Company (NASDAQ:KHC) shares are down more than -25.33% this year and recently decreased -2.07% or -$1.23 to settle at $58.06. The Progressive Corporation (NYSE:PGR), on the other hand, is up 7.17% year to date as of 05/17/2018. It currently trades at $60.36 and has returned -3.22% during the past week.

The Kraft Heinz Company (NASDAQ:KHC) and The Progressive Corporation (NYSE:PGR) are the two most active stocks in the Food – Major Diversified 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

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect KHC to grow earnings at a 7.05% annual rate over the next 5 years. Comparatively, PGR is expected to grow at a 19.58% annual rate. All else equal, PGR’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 10.02% for The Progressive Corporation (PGR). KHC’s ROI is 5.40% while PGR has a ROI of 13.10%. The interpretation is that PGR’s business generates a higher return on investment than KHC’s.

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. KHC’s free cash flow (“FCF”) per share for the trailing twelve months was -0.58. Comparatively, PGR’s free cash flow per share was +1.80. On a percent-of-sales basis, KHC’s free cash flow was -2.7% while PGR converted 3.91% of its revenues into cash flow. This means that, for a given level of sales, PGR is able to generate more free cash flow for investors.

Liquidity and Financial Risk

KHC’s debt-to-equity ratio is 0.49 versus a D/E of 0.39 for PGR. KHC is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

KHC trades at a forward P/E of 14.58, a P/B of 1.07, and a P/S of 2.67, compared to a forward P/E of 15.21, a P/B of 3.57, and a P/S of 1.26 for PGR. 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

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. KHC is currently priced at a -14.1% to its one-year price target of 67.59. Comparatively, PGR is -5.88% relative to its price target of 64.13. This suggests that KHC is the better investment over the next year.

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. KHC has a short ratio of 4.77 compared to a short interest of 2.31 for PGR. This implies that the market is currently less bearish on the outlook for PGR.

Summary

The Progressive Corporation (NYSE:PGR) beats The Kraft Heinz Company (NASDAQ:KHC) on a total of 7 of the 14 factors compared between the two stocks. PGR is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. Finally, PGR has better sentiment signals based on short interest.

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