Finance

Gerdau S.A. (GGB) vs. America Movil, S.A.B. de C.V. (AMX): Which is the Better Investment?

Gerdau S.A. (NYSE:GGB) shares are up more than 29.30% this year and recently decreased -2.63% or -$0.13 to settle at $4.81. America Movil, S.A.B. de C.V. (NYSE:AMX), on the other hand, is down -4.49% year to date as of 05/17/2018. It currently trades at $16.38 and has returned -6.02% during the past week.

Gerdau S.A. (NYSE:GGB) and America Movil, S.A.B. de C.V. (NYSE:AMX) are the two most active stocks in the Steel & Iron 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

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect GGB to grow earnings at a 25.43% annual rate over the next 5 years. Comparatively, AMX is expected to grow at a 21.80% annual rate. All else equal, GGB’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use Return on Investment (ROI) as measures of profitability and return. GGB’s ROI is 1.90% while AMX has a ROI of 8.40%. The interpretation is that AMX’s business generates a higher return on investment than GGB’s.

Cash Flow



The value of a stock is simply the present value of its future free cash flows. GGB’s free cash flow (“FCF”) per share for the trailing twelve months was +0.43. Comparatively, AMX’s free cash flow per share was -0.09. On a percent-of-sales basis, GGB’s free cash flow was 6.4% while AMX converted -0.58% of its revenues into cash flow. This means that, for a given level of sales, GGB 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. GGB has a current ratio of 2.40 compared to 0.90 for AMX. This means that GGB can more easily cover its most immediate liabilities over the next twelve months. GGB’s debt-to-equity ratio is 0.75 versus a D/E of 3.58 for AMX. AMX is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

GGB trades at a forward P/E of 11.37, a P/B of 1.22, and a P/S of 0.72, compared to a forward P/E of 13.48, a P/B of 5.46, and a P/S of 1.05 for AMX. GGB is the cheaper 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”. GGB is currently priced at a -30.99% to its one-year price target of 6.97. Comparatively, AMX is -16.85% relative to its price target of 19.70. This suggests that GGB 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. GGB has a beta of 2.39 and AMX’s beta is 0.50. AMX’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. GGB has a short ratio of 5.62 compared to a short interest of 6.39 for AMX. This implies that the market is currently less bearish on the outlook for GGB.

Summary

Gerdau S.A. (NYSE:GGB) beats America Movil, S.A.B. de C.V. (NYSE:AMX) on a total of 11 of the 14 factors compared between the two stocks. GGB is growing fastly, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, GGB is the cheaper of the two stocks on an earnings, book value and sales basis, GGB is more undervalued relative to its price target. Finally, GGB has better sentiment signals based on short interest.

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