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A Side-by-side Analysis of DowDuPont Inc. (DWDP) and Skyworks Solutions, Inc. (SWKS)

DowDuPont Inc. (NYSE:DWDP) shares are down more than -3.23% this year and recently decreased -0.46% or -$0.32 to settle at $68.92. Skyworks Solutions, Inc. (NASDAQ:SWKS), on the other hand, is down -8.15% year to date as of 09/13/2018. It currently trades at $87.21 and has returned -1.64% during the past week.

DowDuPont Inc. (NYSE:DWDP) and Skyworks Solutions, Inc. (NASDAQ:SWKS) are the two most active stocks in the Chemicals – Major Diversified 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 DWDP to grow earnings at a 7.00% annual rate over the next 5 years. Comparatively, SWKS is expected to grow at a 13.03% annual rate. All else equal, SWKS’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 42.07% for Skyworks Solutions, Inc. (SWKS). DWDP’s ROI is 0.70% while SWKS has a ROI of 24.80%. The interpretation is that SWKS’s business generates a higher return on investment than DWDP’s.

Cash Flow



Cash is king when it comes to investing. DWDP’s free cash flow (“FCF”) per share for the trailing twelve months was +0.17. Comparatively, SWKS’s free cash flow per share was +0.05. On a percent-of-sales basis, DWDP’s free cash flow was 0.63% while SWKS converted 0.25% of its revenues into cash flow. This means that, for a given level of sales, DWDP 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. DWDP has a current ratio of 1.70 compared to 7.30 for SWKS. This means that SWKS can more easily cover its most immediate liabilities over the next twelve months. DWDP’s debt-to-equity ratio is 0.35 versus a D/E of 0.00 for SWKS. DWDP is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

DWDP trades at a forward P/E of 14.10, a P/B of 1.62, and a P/S of 1.96, compared to a forward P/E of 11.07, a P/B of 3.87, and a P/S of 4.12 for SWKS. 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. DWDP is currently priced at a -15.95% to its one-year price target of 82.00. Comparatively, SWKS is -26.02% relative to its price target of 117.88. This suggests that SWKS 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. DWDP has a short ratio of 2.19 compared to a short interest of 3.71 for SWKS. This implies that the market is currently less bearish on the outlook for DWDP.

Summary




Skyworks Solutions, Inc. (NASDAQ:SWKS) beats DowDuPont Inc. (NYSE:DWDP) on a total of 7 of the 14 factors compared between the two stocks. SWKS has higher cash flow per share, is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. SWKS is more undervalued relative to its price target. Finally, MMM has better sentiment signals based on short interest.

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