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A Side-by-side Analysis of CA, Inc. (CA) and Aetna Inc. (AET)

CA, Inc. (NASDAQ:CA) shares are up more than 32.06% this year and recently increased 0.07% or $0.03 to settle at $43.95. Aetna Inc. (NYSE:AET), on the other hand, is up 12.55% year to date as of 09/13/2018. It currently trades at $203.03 and has returned 0.20% during the past week.

CA, Inc. (NASDAQ:CA) and Aetna Inc. (NYSE:AET) are the two most active stocks in the Business Software & Services industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity 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 CA to grow earnings at a 5.52% annual rate over the next 5 years. Comparatively, AET is expected to grow at a 9.79% annual rate. All else equal, AET’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., compared to an EBITDA margin of 9.74% for Aetna Inc. (AET). CA’s ROI is 10.00% while AET has a ROI of 9.90%. The interpretation is that CA’s business generates a higher return on investment than AET’s.

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. CA’s free cash flow (“FCF”) per share for the trailing twelve months was +0.34. Comparatively, AET’s free cash flow per share was +2.31. On a percent-of-sales basis, CA’s free cash flow was 3.36% while AET converted 1.25% of its revenues into cash flow. This means that, for a given level of sales, CA is able to generate more free cash flow for investors.

Liquidity and Financial Risk

CA’s debt-to-equity ratio is 0.35 versus a D/E of 0.47 for AET. AET is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

CA trades at a forward P/E of 15.31, a P/B of 2.31, and a P/S of 4.43, compared to a forward P/E of 16.57, a P/B of 3.82, and a P/S of 1.09 for AET. 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 is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. CA is currently priced at a 3.39% to its one-year price target of 42.51. Comparatively, AET is -0.12% relative to its price target of 203.27. This suggests that AET is the better investment over the next year.

Risk and Volatility

No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. CA has a beta of 0.82 and AET’s beta is 0.67. AET’s shares are therefore the less volatile of the two stocks.

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. CA has a short ratio of 3.24 compared to a short interest of 2.59 for AET. This implies that the market is currently less bearish on the outlook for AET.

Summary




Aetna Inc. (NYSE:AET) beats CA, Inc. (NASDAQ:CA) on a total of 7 of the 14 factors compared between the two stocks. AET is more profitable and has higher cash flow per share. AET is more undervalued relative to its price target. Finally, AET has better sentiment signals based on short interest.

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