ON Semiconductor Corporation (NASDAQ:ON) shares are up more than 13.18% this year and recently decreased -0.50% or -$0.12 to settle at $23.70. The Interpublic Group of Companies, Inc. (NYSE:IPG), on the other hand, is up 18.70% year to date as of 05/17/2018. It currently trades at $23.93 and has returned -1.16% during the past week.
ON Semiconductor Corporation (NASDAQ:ON) and The Interpublic Group of Companies, Inc. (NYSE:IPG) are the two most active stocks in the Semiconductor – Broad Line 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
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect ON to grow earnings at a 14.93% annual rate over the next 5 years. Comparatively, IPG is expected to grow at a 8.47% annual rate. All else equal, ON’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 13.47% for The Interpublic Group of Companies, Inc. (IPG). ON’s ROI is 8.10% while IPG has a ROI of 17.60%. The interpretation is that IPG’s business generates a higher return on investment than ON’s.Cash Flow
The value of a stock is simply the present value of its future free cash flows. ON’s free cash flow (“FCF”) per share for the trailing twelve months was +0.26. Comparatively, IPG’s free cash flow per share was -2.17. On a percent-of-sales basis, ON’s free cash flow was 2.01% while IPG converted -10.61% of its revenues into cash flow. This means that, for a given level of sales, ON 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. ON has a current ratio of 1.50 compared to 1.00 for IPG. This means that ON can more easily cover its most immediate liabilities over the next twelve months. ON’s debt-to-equity ratio is 0.97 versus a D/E of 0.99 for IPG. IPG is therefore the more solvent of the two companies, and has lower financial risk.Valuation
ON trades at a forward P/E of 12.09, a P/B of 3.44, and a P/S of 1.84, compared to a forward P/E of 12.82, a P/B of 4.35, and a P/S of 1.11 for IPG. 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”. ON is currently priced at a -9.75% to its one-year price target of 26.26. Comparatively, IPG is -4.28% relative to its price target of 25.00. This suggests that ON is the better investment over the next year.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. ON has a beta of 2.01 and IPG’s beta is 1.29. IPG’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. ON has a short ratio of 3.36 compared to a short interest of 4.89 for IPG. This implies that the market is currently less bearish on the outlook for ON.Summary
ON Semiconductor Corporation (NASDAQ:ON) beats The Interpublic Group of Companies, Inc. (NYSE:IPG) on a total of 11 of the 14 factors compared between the two stocks. ON is growing fastly, is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, ON is the cheaper of the two stocks on an earnings and book value, ON is more undervalued relative to its price target. Finally, ON has better sentiment signals based on short interest.