Pfizer Inc. (NYSE:PFE) shares are down more than -1.41% this year and recently increased 0.08% or $0.03 to settle at $35.71. Starbucks Corporation (NASDAQ:SBUX), on the other hand, is down -0.40% year to date as of 05/17/2018. It currently trades at $57.20 and has returned -0.78% during the past week.
Pfizer Inc. (NYSE:PFE) and Starbucks Corporation (NASDAQ:SBUX) are the two most active stocks in the Drug Manufacturers – Major 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
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect PFE to grow earnings at a 6.90% annual rate over the next 5 years. Comparatively, SBUX is expected to grow at a 14.30% annual rate. All else equal, SBUX’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 29.75% for Starbucks Corporation (SBUX). PFE’s ROI is 9.90% while SBUX has a ROI of 28.80%. The interpretation is that SBUX’s business generates a higher return on investment than PFE’s.Cash Flow
Cash is king when it comes to investing. PFE’s free cash flow (“FCF”) per share for the trailing twelve months was -0.07. Comparatively, SBUX’s free cash flow per share was -0.31. On a percent-of-sales basis, PFE’s free cash flow was -0.79% while SBUX converted -1.91% of its revenues into cash flow. This means that, for a given level of sales, PFE 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. PFE has a current ratio of 1.30 compared to 1.10 for SBUX. This means that PFE can more easily cover its most immediate liabilities over the next twelve months. PFE’s debt-to-equity ratio is 0.58 versus a D/E of 1.39 for SBUX. SBUX is therefore the more solvent of the two companies, and has lower financial risk.Valuation
PFE trades at a forward P/E of 11.59, a P/B of 3.03, and a P/S of 4.04, compared to a forward P/E of 20.69, a P/B of 16.92, and a P/S of 3.35 for SBUX. 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”. PFE is currently priced at a -10.05% to its one-year price target of 39.70. Comparatively, SBUX is -10.42% relative to its price target of 63.85. This suggests that SBUX 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. PFE has a beta of 0.87 and SBUX’s beta is 0.61. SBUX’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. PFE has a short ratio of 2.93 compared to a short interest of 3.07 for SBUX. This implies that the market is currently less bearish on the outlook for PFE.Summary
Pfizer Inc. (NYSE:PFE) beats Starbucks Corporation (NASDAQ:SBUX) on a total of 8 of the 14 factors compared between the two stocks. PFE 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, PFE is the cheaper of the two stocks on an earnings and book value, Finally, PFE has better sentiment signals based on short interest.