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CA, Inc. (CA) vs. The Kroger Co. (KR): Breaking Down the Two Hottest Stocks

CA, Inc. (NASDAQ:CA) shares are up more than 32.18% this year and recently decreased -0.07% or -$0.03 to settle at $43.99. The Kroger Co. (NYSE:KR), on the other hand, is up 2.44% year to date as of 07/19/2018. It currently trades at $28.12 and has returned 0.61% during the past week.

CA, Inc. (NASDAQ:CA) and The Kroger Co. (NYSE:KR) are the two most active stocks in the Business Software & Services 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

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect CA to grow earnings at a 5.71% annual rate over the next 5 years. Comparatively, KR is expected to grow at a 6.51% annual rate. All else equal, KR’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 5.49% for The Kroger Co. (KR). CA’s ROI is 10.00% while KR has a ROI of 7.00%. The interpretation is that CA’s business generates a higher return on investment than KR’s.

Cash Flow



The amount of free cash flow available to investors is ultimately what determines the value of a stock. CA’s free cash flow (“FCF”) per share for the trailing twelve months was +1.03. Comparatively, KR’s free cash flow per share was +1.65. On a percent-of-sales basis, CA’s free cash flow was 10.23% while KR converted 1.07% of its revenues into cash flow. This means that, for a given level of sales, CA is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. CA has a current ratio of 1.30 compared to 0.80 for KR. This means that CA can more easily cover its most immediate liabilities over the next twelve months. CA’s debt-to-equity ratio is 0.47 versus a D/E of 2.05 for KR. KR is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

CA trades at a forward P/E of 15.38, a P/B of 3.09, and a P/S of 3.69, compared to a forward P/E of 12.42, a P/B of 3.38, and a P/S of 0.18 for KR. CA is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S 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

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. CA is currently priced at a 14.08% to its one-year price target of 38.56. Comparatively, KR is 2.52% relative to its price target of 27.43. This suggests that KR 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. CA has a beta of 0.80 and KR’s beta is 0.94. CA’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. CA has a short ratio of 3.18 compared to a short interest of 4.26 for KR. This implies that the market is currently less bearish on the outlook for CA.

Summary

CA, Inc. (NASDAQ:CA) beats The Kroger Co. (NYSE:KR) on a total of 8 of the 14 factors compared between the two stocks. CA is more profitable, generates a higher return on investment, has a higher cash conversion rate, higher liquidity and has lower financial risk. Finally, CA has better sentiment signals based on short interest.

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