Finance

A Side-by-side Analysis of Texas Instruments Incorporated (TXN) and Peabody Energy Corporation (BTU)

Texas Instruments Incorporated (NASDAQ:TXN) shares are up more than 4.75% this year and recently decreased -0.18% or -$0.2 to settle at $109.40. Peabody Energy Corporation (NYSE:BTU), on the other hand, is up 5.00% year to date as of 08/16/2018. It currently trades at $41.34 and has returned -5.10% during the past week.

Texas Instruments Incorporated (NASDAQ:TXN) and Peabody Energy Corporation (NYSE:BTU) are the two most active stocks in the Semiconductor – Broad Line industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect TXN to grow earnings at a 14.41% annual rate over the next 5 years.

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 0.37% for Peabody Energy Corporation (BTU). TXN’s ROI is 26.00% while BTU has a ROI of 25.30%. The interpretation is that TXN’s business generates a higher return on investment than BTU’s.

Cash Flow



Cash is king when it comes to investing. TXN’s free cash flow (“FCF”) per share for the trailing twelve months was +0.97. Comparatively, BTU’s free cash flow per share was +1.94. On a percent-of-sales basis, TXN’s free cash flow was 6.3% while BTU converted 4.23% of its revenues into cash flow. This means that, for a given level of sales, TXN is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. TXN has a current ratio of 6.50 compared to 2.30 for BTU. This means that TXN can more easily cover its most immediate liabilities over the next twelve months. TXN’s debt-to-equity ratio is 0.48 versus a D/E of 0.40 for BTU. TXN is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

TXN trades at a forward P/E of 17.69, a P/B of 10.06, and a P/S of 7.16, compared to a forward P/E of 16.18, a P/B of 1.47, and a P/S of 0.91 for BTU. TXN 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

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”. TXN is currently priced at a -12.27% to its one-year price target of 124.70. Comparatively, BTU is -21.79% relative to its price target of 52.86. This suggests that BTU is the better investment over the next year.

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. TXN has a short ratio of 3.59 compared to a short interest of 3.73 for BTU. This implies that the market is currently less bearish on the outlook for TXN.

Summary




Peabody Energy Corporation (NYSE:BTU) beats Texas Instruments Incorporated (NASDAQ:TXN) on a total of 8 of the 14 factors compared between the two stocks. BTU is growing fastly and has lower financial risk. In terms of valuation, BTU is the cheaper of the two stocks on an earnings, book value and sales basis, BTU is more undervalued relative to its price target. Finally, MCD has better sentiment signals based on short interest.

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