Global

A Side-by-side Analysis of FireEye, Inc. (FEYE) and Weight Watchers International, Inc. (WTW)

FireEye, Inc. (NASDAQ:FEYE) shares are up more than 7.25% this year and recently decreased -1.04% or -$0.16 to settle at $15.23. Weight Watchers International, Inc. (NYSE:WTW), on the other hand, is up 74.86% year to date as of 08/09/2018. It currently trades at $77.43 and has returned -15.31% during the past week.

FireEye, Inc. (NASDAQ:FEYE) and Weight Watchers International, Inc. (NYSE:WTW) are the two most active stocks in the Application Software 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

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Comparatively, WTW is expected to grow at a 39.70% annual rate. All else equal, WTW’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. EBITDA margin of 25.66% for Weight Watchers International, Inc. (WTW). FEYE’s ROI is -18.60% while WTW has a ROI of 25.10%. The interpretation is that WTW’s business generates a higher return on investment than FEYE’s.

Cash Flow



The amount of free cash flow available to investors is ultimately what determines the value of a stock. FEYE’s free cash flow (“FCF”) per share for the trailing twelve months was -0.30. Comparatively, WTW’s free cash flow per share was +1.03. On a percent-of-sales basis, FEYE’s free cash flow was -0.01% while WTW converted 5.22% of its revenues into cash flow. This means that, for a given level of sales, WTW 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. FEYE has a current ratio of 1.70 compared to 0.70 for WTW. This means that FEYE can more easily cover its most immediate liabilities over the next twelve months.

Valuation

FEYE trades at a forward P/E of 95.19, a P/B of 4.59, and a P/S of 3.86, compared to a forward P/E of 20.55, and a P/S of 3.64 for WTW. FEYE 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 isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. FEYE is currently priced at a -15.58% to its one-year price target of 18.04. Comparatively, WTW is -33.25% relative to its price target of 116.00. This suggests that WTW 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. FEYE has a beta of 0.36 and WTW’s beta is 3.06. FEYE’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. FEYE has a short ratio of 7.90 compared to a short interest of 3.43 for WTW. This implies that the market is currently less bearish on the outlook for WTW.

Summary

Weight Watchers International, Inc. (NYSE:WTW) beats FireEye, Inc. (NASDAQ:FEYE) on a total of 12 of the 14 factors compared between the two stocks. WTW higher liquidity, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, WTW is the cheaper of the two stocks on an earnings, book value and sales basis, WTW is more undervalued relative to its price target. Finally, WTW has better sentiment signals based on short interest.

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