MGM Resorts International (NYSE:MGM) shares are down more than -3.62% this year and recently increased 0.81% or $0.26 to settle at $32.18. Arconic Inc. (NYSE:ARNC), on the other hand, is down -33.39% year to date as of 05/17/2018. It currently trades at $18.15 and has returned 0.06% during the past week.
MGM Resorts International (NYSE:MGM) and Arconic Inc. (NYSE:ARNC) are the two most active stocks in the Resorts & Casinos 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
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect MGM to grow earnings at a -2.00% annual rate over the next 5 years. Comparatively, ARNC is expected to grow at a 21.46% annual rate. All else equal, ARNC’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 10.32% for Arconic Inc. (ARNC). MGM’s ROI is 7.10% while ARNC has a ROI of 0.50%. The interpretation is that MGM’s business generates a higher return on investment than ARNC’s.Cash Flow
Earnings don’t always accurately reflect the amount of cash that a company brings in. MGM’s free cash flow (“FCF”) per share for the trailing twelve months was +0.16. Comparatively, ARNC’s free cash flow per share was -1.16. On a percent-of-sales basis, MGM’s free cash flow was 0.83% while ARNC converted -4.32% of its revenues into cash flow. This means that, for a given level of sales, MGM 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. MGM has a current ratio of 0.70 compared to 2.10 for ARNC. This means that ARNC can more easily cover its most immediate liabilities over the next twelve months. MGM’s debt-to-equity ratio is 1.80 versus a D/E of 1.22 for ARNC. MGM is therefore the more solvent of the two companies, and has lower financial risk.Valuation
MGM trades at a forward P/E of 18.04, a P/B of 2.47, and a P/S of 1.70, compared to a forward P/E of 11.38, a P/B of 1.68, and a P/S of 0.66 for ARNC. MGM 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
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. MGM is currently priced at a -17.1% to its one-year price target of 38.82. Comparatively, ARNC is -36.18% relative to its price target of 28.44. This suggests that ARNC 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. MGM has a beta of 1.41 and ARNC’s beta is 1.16. ARNC’s shares are therefore the less volatile of the two stocks.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. MGM has a short ratio of 2.18 compared to a short interest of 2.57 for ARNC. This implies that the market is currently less bearish on the outlook for MGM.Summary
Arconic Inc. (NYSE:ARNC) beats MGM Resorts International (NYSE:MGM) on a total of 8 of the 14 factors compared between the two stocks. ARNC is more profitable, higher liquidity and has lower financial risk. In terms of valuation, ARNC is the cheaper of the two stocks on an earnings, book value and sales basis, ARNC is more undervalued relative to its price target. Finally, BGCP has better sentiment signals based on short interest.