Knowles Corporation (NYSE:KN) shares are up more than 12.48% this year and recently increased 1.60% or $0.26 to settle at $16.49. Himax Technologies, Inc. (NASDAQ:HIMX), on the other hand, is down -40.69% year to date as of 09/11/2018. It currently trades at $6.18 and has returned -4.04% during the past week.
Knowles Corporation (NYSE:KN) and Himax Technologies, Inc. (NASDAQ:HIMX) are the two most active stocks in the Communication Equipment 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
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 KN to grow earnings at a 15.00% annual rate over the next 5 years. Comparatively, HIMX is expected to grow at a 25.00% annual rate. All else equal, HIMX’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. Knowles Corporation (KN) has an EBITDA margin of 10.57%. This suggests that KN underlying business is more profitable KN’s ROI is 3.40% while HIMX has a ROI of 0.60%. The interpretation is that KN’s business generates a higher return on investment than HIMX’s.Cash Flow
Earnings don’t always accurately reflect the amount of cash that a company brings in. KN’s free cash flow (“FCF”) per share for the trailing twelve months was -0.11. Comparatively, HIMX’s free cash flow per share was -0.13. On a percent-of-sales basis, KN’s free cash flow was -0% while HIMX converted -0% of its revenues into cash flow. This means that, for a given level of sales, KN 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. KN has a current ratio of 2.60 compared to 1.80 for HIMX. This means that KN can more easily cover its most immediate liabilities over the next twelve months. KN’s debt-to-equity ratio is 0.00 versus a D/E of 0.34 for HIMX. HIMX is therefore the more solvent of the two companies, and has lower financial risk.Valuation
KN trades at a forward P/E of 15.09, a P/B of 1.30, and a P/S of 2.10, compared to a forward P/E of 30.29, a P/B of 1.21, and a P/S of 1.52 for HIMX. KN 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. KN is currently priced at a -8.69% to its one-year price target of 18.06. Comparatively, HIMX is -17.6% relative to its price target of 7.50. This suggests that HIMX 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. KN has a beta of 1.02 and HIMX’s beta is -0.53. HIMX’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. KN has a short ratio of 13.34 compared to a short interest of 12.46 for HIMX. This implies that the market is currently less bearish on the outlook for HIMX.Summary
Knowles Corporation (NYSE:KN) beats Himax Technologies, Inc. (NASDAQ:HIMX) on a total of 7 of the 14 factors compared between the two stocks. KN is more profitable, generates a higher return on investment, has higher cash flow per share, higher liquidity and has lower financial risk. Finally, PZZA has better sentiment signals based on short interest.