Global

Microsoft Corporation (MSFT) vs. PPL Corporation (PPL): Comparing the Business Software & Services Industry’s Most Active Stocks

Microsoft Corporation (NASDAQ:MSFT) shares are up more than 12.44% this year and recently decreased -1.00% or -$0.97 to settle at $96.18. PPL Corporation (NYSE:PPL), on the other hand, is down -13.60% year to date as of 05/17/2018. It currently trades at $26.74 and has returned -5.11% during the past week.

Microsoft Corporation (NASDAQ:MSFT) and PPL Corporation (NYSE:PPL) are the two most active stocks in the Business Software & Services 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 consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect MSFT to grow earnings at a 12.28% annual rate over the next 5 years. Comparatively, PPL is expected to grow at a 2.14% annual rate. All else equal, MSFT’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 52.76% for PPL Corporation (PPL). MSFT’s ROI is 11.70% while PPL has a ROI of 8.10%. The interpretation is that MSFT’s business generates a higher return on investment than PPL’s.

Cash Flow



Cash is king when it comes to investing. MSFT’s free cash flow (“FCF”) per share for the trailing twelve months was +0.77. Comparatively, PPL’s free cash flow per share was -0.66. On a percent-of-sales basis, MSFT’s free cash flow was 6.59% while PPL converted -6.2% of its revenues into cash flow. This means that, for a given level of sales, MSFT 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. MSFT has a current ratio of 3.40 compared to 0.60 for PPL. This means that MSFT can more easily cover its most immediate liabilities over the next twelve months. MSFT’s debt-to-equity ratio is 0.97 versus a D/E of 1.96 for PPL. PPL is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

MSFT trades at a forward P/E of 23.98, a P/B of 9.35, and a P/S of 7.08, compared to a forward P/E of 10.95, a P/B of 1.66, and a P/S of 2.46 for PPL. MSFT 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”. MSFT is currently priced at a -11.97% to its one-year price target of 109.26.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. MSFT has a beta of 1.04 and PPL’s beta is 0.56. PPL’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. MSFT has a short ratio of 1.59 compared to a short interest of 2.54 for PPL. This implies that the market is currently less bearish on the outlook for MSFT.

Summary

Microsoft Corporation (NASDAQ:MSFT) beats PPL Corporation (NYSE:PPL) on a total of 7 of the 13 factors compared between the two stocks. MSFT is growing fastly, 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. Finally, MSFT has better sentiment signals based on short interest.

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