Altria Group, Inc. (NYSE:MO) shares are down more than -17.07% this year and recently increased 1.04% or $0.61 to settle at $59.22. Hanesbrands Inc. (NYSE:HBI), on the other hand, is down -10.19% year to date as of 08/09/2018. It currently trades at $18.78 and has returned 2.74% during the past week.
Altria Group, Inc. (NYSE:MO) and Hanesbrands Inc. (NYSE:HBI) are the two most active stocks in the Cigarettes industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.Growth
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect MO to grow earnings at a 10.14% annual rate over the next 5 years. Comparatively, HBI is expected to grow at a 0.70% annual rate. All else equal, MO’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. Altria Group, Inc. (MO) has an EBITDA margin of 42.39%. This suggests that MO underlying business is more profitable MO’s ROI is 24.00% while HBI has a ROI of 15.20%. The interpretation is that MO’s business generates a higher return on investment than HBI’s.Cash Flow
Earnings don’t always accurately reflect the amount of cash that a company brings in. MO’s free cash flow (“FCF”) per share for the trailing twelve months was -0.17. Comparatively, HBI’s free cash flow per share was -0.03. On a percent-of-sales basis, MO’s free cash flow was -1.25% while HBI converted -0.17% of its revenues into cash flow. This means that, for a given level of sales, HBI 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. MO has a current ratio of 0.60 compared to 2.00 for HBI. This means that HBI can more easily cover its most immediate liabilities over the next twelve months. MO’s debt-to-equity ratio is 0.88 versus a D/E of 5.86 for HBI. HBI is therefore the more solvent of the two companies, and has lower financial risk.Valuation
MO trades at a forward P/E of 13.62, a P/B of 7.09, and a P/S of 4.44, compared to a forward P/E of 9.94, a P/B of 8.86, and a P/S of 1.02 for HBI. MO 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
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. MO is currently priced at a -11.93% to its one-year price target of 67.24. Comparatively, HBI is -12.37% relative to its price target of 21.43. This suggests that HBI is the better investment over the next year.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. MO has a beta of 0.66 and HBI’s beta is 0.52. HBI’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. MO has a short ratio of 2.73 compared to a short interest of 8.49 for HBI. This implies that the market is currently less bearish on the outlook for MO.Summary
Hanesbrands Inc. (NYSE:HBI) beats Altria Group, Inc. (NYSE:MO) on a total of 7 of the 14 factors compared between the two stocks. HBI is growing fastly, has a higher cash conversion rate and higher liquidity. In terms of valuation, HBI is the cheaper of the two stocks on an earnings and sales basis, HBI is more undervalued relative to its price target.