Macy’s, Inc. (NYSE:M) shares are up more than 34.34% this year and recently increased 2.02% or $0.67 to settle at $33.84. American International Group, Inc. (NYSE:AIG), on the other hand, is down -8.04% year to date as of 05/17/2018. It currently trades at $54.79 and has returned 3.87% during the past week.
Macy’s, Inc. (NYSE:M) and American International Group, Inc. (NYSE:AIG) are the two most active stocks in the Department Stores industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.Growth
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect M to grow earnings at a 18.64% annual rate over the next 5 years. Comparatively, AIG is expected to grow at a 36.48% annual rate. All else equal, AIG’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. , compared to an EBITDA margin of 13.08% for American International Group, Inc. (AIG). M’s ROI is 11.00% while AIG has a ROI of 1.90%. The interpretation is that M’s business generates a higher return on investment than AIG’s.Cash Flow
Cash is king when it comes to investing. M’s free cash flow (“FCF”) per share for the trailing twelve months was +4.27. Comparatively, AIG’s free cash flow per share was -1.33. On a percent-of-sales basis, M’s free cash flow was 5.24% while AIG converted -2.41% of its revenues into cash flow. This means that, for a given level of sales, M is able to generate more free cash flow for investors.Liquidity and Financial Risk
M’s debt-to-equity ratio is 1.04 versus a D/E of 0.54 for AIG. M is therefore the more solvent of the two companies, and has lower financial risk.
M trades at a forward P/E of 10.55, a P/B of 1.82, and a P/S of 0.42, compared to a forward P/E of 9.71, a P/B of 0.79, and a P/S of 1.01 for AIG. M is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. 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
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. M is currently priced at a 13.9% to its one-year price target of 29.71. Comparatively, AIG is -19.18% relative to its price target of 67.79. This suggests that AIG is the better investment over the next year.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. M has a beta of 0.70 and AIG’s beta is 1.20. M’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. M has a short ratio of 4.40 compared to a short interest of 2.05 for AIG. This implies that the market is currently less bearish on the outlook for AIG.Summary
American International Group, Inc. (NYSE:AIG) beats Macy’s, Inc. (NYSE:M) on a total of 8 of the 14 factors compared between the two stocks. AIG generates a higher return on investment, is more profitable and has lower financial risk. In terms of valuation, AIG is the cheaper of the two stocks on an earnings and book value, AIG is more undervalued relative to its price target. Finally, AIG has better sentiment signals based on short interest.