AstraZeneca PLC (NYSE:AZN) shares are up more than 5.01% this year and recently decreased -0.16% or -$0.06 to settle at $36.44. United Technologies Corporation (NYSE:UTX), on the other hand, is down -2.32% year to date as of 05/17/2018. It currently trades at $124.61 and has returned 0.41% during the past week.
AstraZeneca PLC (NYSE:AZN) and United Technologies Corporation (NYSE:UTX) are the two most active stocks in the Drug Manufacturers – Major industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.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 AZN to grow earnings at a 12.10% annual rate over the next 5 years. Comparatively, UTX is expected to grow at a 7.50% annual rate. All else equal, AZN’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 EBITDA margin and Return on Investment (ROI) as measures of profitability and return. EBITDA margin of 17.52% for United Technologies Corporation (UTX). AZN’s ROI is 13.30% while UTX has a ROI of 11.40%. The interpretation is that AZN’s business generates a higher return on investment than UTX’s.Cash Flow
If there’s one thing investors care more about than earnings, it’s cash flow. AZN’s free cash flow (“FCF”) per share for the trailing twelve months was +0.36. Comparatively, UTX’s free cash flow per share was -0.52. On a percent-of-sales basis, AZN’s free cash flow was 4.06% while UTX converted -0.7% of its revenues into cash flow. This means that, for a given level of sales, AZN 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. AZN has a current ratio of 0.80 compared to 1.30 for UTX. This means that UTX can more easily cover its most immediate liabilities over the next twelve months. AZN’s debt-to-equity ratio is 1.19 versus a D/E of 0.90 for UTX. AZN is therefore the more solvent of the two companies, and has lower financial risk.Valuation
AZN trades at a forward P/E of 19.61, a P/B of 6.17, and a P/S of 4.11, compared to a forward P/E of 15.95, a P/B of 3.22, and a P/S of 1.61 for UTX. AZN 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
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. AZN is currently priced at a -6.3% to its one-year price target of 38.89. Comparatively, UTX is -15.05% relative to its price target of 146.69. This suggests that UTX is the better investment over the next year.
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. AZN has a beta of 0.62 and UTX’s beta is 1.08. AZN’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. AZN has a short ratio of 2.32 compared to a short interest of 3.29 for UTX. This implies that the market is currently less bearish on the outlook for AZN.Summary
United Technologies Corporation (NYSE:UTX) beats AstraZeneca PLC (NYSE:AZN) on a total of 7 of the 14 factors compared between the two stocks. UTX is growing fastly, higher liquidity and has lower financial risk. In terms of valuation, UTX is the cheaper of the two stocks on an earnings, book value and sales basis, UTX is more undervalued relative to its price target.