Altria Group, Inc. (NYSE:MO) shares are down more than -16.08% this year and recently decreased -1.74% or -$1.06 to settle at $59.93. Yum China Holdings, Inc. (NYSE:YUMC), on the other hand, is down -11.22% year to date as of 08/21/2018. It currently trades at $35.53 and has returned -0.14% during the past week.
Altria Group, Inc. (NYSE:MO) and Yum China Holdings, Inc. (NYSE:YUMC) are the two most active stocks in the Cigarettes 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
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect MO to grow earnings at a 10.14% annual rate over the next 5 years. Comparatively, YUMC is expected to grow at a 16.37% annual rate. All else equal, YUMC’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 17.66% for Yum China Holdings, Inc. (YUMC). MO’s ROI is 24.00% while YUMC has a ROI of 20.30%. The interpretation is that MO’s business generates a higher return on investment than YUMC’s.Cash Flow
Cash is king when it comes to investing. MO’s free cash flow (“FCF”) per share for the trailing twelve months was -0.17. Comparatively, YUMC’s free cash flow per share was +0.28. On a percent-of-sales basis, MO’s free cash flow was -1.25% while YUMC converted 1.5% of its revenues into cash flow. This means that, for a given level of sales, YUMC is able to generate more free cash flow for investors.Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. MO has a current ratio of 0.60 compared to 1.70 for YUMC. This means that YUMC 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 0.00 for YUMC. MO is therefore the more solvent of the two companies, and has lower financial risk.Valuation
MO trades at a forward P/E of 13.78, a P/B of 7.18, and a P/S of 4.49, compared to a forward P/E of 21.64, a P/B of 4.57, and a P/S of 1.60 for YUMC. MO is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B 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. MO is currently priced at a -10.87% to its one-year price target of 67.24. Comparatively, YUMC is -15.2% relative to its price target of 41.90. This suggests that YUMC is the better investment over the next year.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. MO has a short ratio of 3.66 compared to a short interest of 1.23 for YUMC. This implies that the market is currently less bearish on the outlook for YUMC.Summary
Yum China Holdings, Inc. (NYSE:YUMC) beats Altria Group, Inc. (NYSE:MO) on a total of 10 of the 14 factors compared between the two stocks. YUMC 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, YUMC is the cheaper of the two stocks on book value and sales basis, YUMC is more undervalued relative to its price target. Finally, YUMC has better sentiment signals based on short interest.