Global

Critical Comparison: Pacific Biosciences of California, Inc. (PACB) vs. Babcock & Wilcox Enterprises, Inc. (BW)

Pacific Biosciences of California, Inc. (NASDAQ:PACB) shares are up more than 72.92% this year and recently decreased -2.87% or -$0.13 to settle at $4.57. Babcock & Wilcox Enterprises, Inc. (NYSE:BW), on the other hand, is down -81.16% year to date as of 09/11/2018. It currently trades at $1.07 and has returned -20.15% during the past week.

Pacific Biosciences of California, Inc. (NASDAQ:PACB) and Babcock & Wilcox Enterprises, Inc. (NYSE:BW) are the two most active stocks in the Biotechnology industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect PACB to grow earnings at a 30.00% annual rate over the next 5 years. Comparatively, BW is expected to grow at a 12.50% annual rate. All else equal, PACB’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 Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. PACB’s ROI is -90.10% while BW has a ROI of -63.70%. The interpretation is that BW’s business generates a higher return on investment than PACB’s.

Cash Flow



Earnings don’t always accurately reflect the amount of cash that a company brings in. On a percent-of-sales basis, PACB’s free cash flow was -0.02% while BW converted 0% of its revenues into cash flow. This means that, for a given level of sales, BW is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. PACB has a current ratio of 4.30 compared to 1.20 for BW. This means that PACB can more easily cover its most immediate liabilities over the next twelve months. PACB’s debt-to-equity ratio is 0.00 versus a D/E of 4.28 for BW. BW is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

PACB trades at a P/B of 7.02, and a P/S of 7.07, compared to a forward P/E of 17.83, a P/B of 2.89, and a P/S of 0.13 for BW. PACB 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

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. PACB is currently priced at a -3.18% to its one-year price target of 4.72. Comparatively, BW is -33.13% relative to its price target of 1.60. This suggests that BW is the better investment over the next year.

Insider Activity and Investor Sentiment

Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. PACB has a short ratio of 9.82 compared to a short interest of 9.33 for BW. This implies that the market is currently less bearish on the outlook for BW.

Summary




Babcock & Wilcox Enterprises, Inc. (NYSE:BW) beats Pacific Biosciences of California, Inc. (NASDAQ:PACB) on a total of 8 of the 14 factors compared between the two stocks. BW is growing fastly, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, BW is the cheaper of the two stocks on book value and sales basis, BW is more undervalued relative to its price target. Finally, BW has better sentiment signals based on short interest.

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