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Critical Comparison: Venator Materials PLC (VNTR) vs. Ambarella, Inc. (AMBA)

Venator Materials PLC (NYSE:VNTR) shares are down more than -48.69% this year and recently decreased -2.83% or -$0.33 to settle at $11.35. Ambarella, Inc. (NASDAQ:AMBA), on the other hand, is down -31.54% year to date as of 09/11/2018. It currently trades at $40.22 and has returned 5.54% during the past week.

Venator Materials PLC (NYSE:VNTR) and Ambarella, Inc. (NASDAQ:AMBA) are the two most active stocks in the Specialty Chemicals 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 consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect VNTR to grow earnings at a 20.30% annual rate over the next 5 years. Comparatively, AMBA is expected to grow at a -2.97% annual rate. All else equal, VNTR’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. EBITDA margin of 3.1% for Ambarella, Inc. (AMBA). VNTR’s ROI is 7.80% while AMBA has a ROI of 4.10%. The interpretation is that VNTR’s business generates a higher return on investment than AMBA’s.

Cash Flow



Earnings don’t always accurately reflect the amount of cash that a company brings in. VNTR’s free cash flow (“FCF”) per share for the trailing twelve months was +1.50. Comparatively, AMBA’s free cash flow per share was +0.17. On a percent-of-sales basis, VNTR’s free cash flow was 7.23% while AMBA converted 0% of its revenues into cash flow. This means that, for a given level of sales, VNTR 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. VNTR has a current ratio of 2.30 compared to 9.20 for AMBA. This means that AMBA can more easily cover its most immediate liabilities over the next twelve months. VNTR’s debt-to-equity ratio is 0.56 versus a D/E of 0.00 for AMBA. VNTR is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

VNTR trades at a forward P/E of 5.31, a P/B of 0.91, and a P/S of 0.52, compared to a forward P/E of 63.54, a P/B of 3.09, and a P/S of 5.04 for AMBA. VNTR is the cheaper 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. VNTR is currently priced at a -37.6% to its one-year price target of 18.19. Comparatively, AMBA is -7.28% relative to its price target of 43.38. This suggests that VNTR 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. VNTR has a short ratio of 0.81 compared to a short interest of 7.25 for AMBA. This implies that the market is currently less bearish on the outlook for VNTR.

Summary




Venator Materials PLC (NYSE:VNTR) beats Ambarella, Inc. (NASDAQ:AMBA) on a total of 11 of the 14 factors compared between the two stocks. VNTR is growing fastly, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, VNTR is the cheaper of the two stocks on an earnings, book value and sales basis, VNTR is more undervalued relative to its price target. Finally, VNTR has better sentiment signals based on short interest.

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