Finance

Comparing Akorn, Inc. (AKRX) and Avon Products, Inc. (AVP)

Akorn, Inc. (NASDAQ:AKRX) shares are down more than -57.83% this year and recently decreased -3.00% or -$0.42 to settle at $13.59. Avon Products, Inc. (NYSE:AVP), on the other hand, is down -8.37% year to date as of 09/11/2018. It currently trades at $1.97 and has returned 2.60% during the past week.

Akorn, Inc. (NASDAQ:AKRX) and Avon Products, Inc. (NYSE:AVP) are the two most active stocks in the Drugs – Generic 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

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect AKRX to grow earnings at a -7.80% annual rate over the next 5 years. Comparatively, AVP is expected to grow at a 5.00% annual rate. All else equal, AVP’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 7.03% for Avon Products, Inc. (AVP). AKRX’s ROI is -0.60% while AVP has a ROI of 12.60%. The interpretation is that AVP’s business generates a higher return on investment than AKRX’s.

Cash Flow



Cash is king when it comes to investing. AKRX’s free cash flow (“FCF”) per share for the trailing twelve months was +0.18. Comparatively, AVP’s free cash flow per share was -0.07. On a percent-of-sales basis, AKRX’s free cash flow was 0% while AVP converted -0.54% of its revenues into cash flow. This means that, for a given level of sales, AKRX 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. AKRX has a current ratio of 3.90 compared to 1.30 for AVP. This means that AKRX can more easily cover its most immediate liabilities over the next twelve months.

Valuation

AKRX trades at a forward P/E of 28.67, a P/B of 2.36, and a P/S of 2.23, compared to a forward P/E of 9.75, and a P/S of 0.15 for AVP. AKRX 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

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. AKRX is currently priced at a -50.13% to its one-year price target of 27.25. Comparatively, AVP is -16.88% relative to its price target of 2.37. This suggests that AKRX is the better investment over the next year.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. AKRX has a beta of 1.93 and AVP’s beta is 1.30. AVP’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. AKRX has a short ratio of 3.87 compared to a short interest of 2.21 for AVP. This implies that the market is currently less bearish on the outlook for AVP.

Summary

Avon Products, Inc. (NYSE:AVP) beats Akorn, Inc. (NASDAQ:AKRX) on a total of 10 of the 14 factors compared between the two stocks. AVP has higher cash flow per share, is more profitable, generates a higher return on investment and has lower financial risk. In terms of valuation, AVP is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, AVP has better sentiment signals based on short interest.

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