Cisco Systems, Inc. (NASDAQ:CSCO) shares are up more than 23.34% this year and recently increased 0.75% or $0.35 to settle at $47.24. ONEOK, Inc. (NYSE:OKE), on the other hand, is up 23.41% year to date as of 09/13/2018. It currently trades at $65.96 and has returned -0.08% during the past week.
Cisco Systems, Inc. (NASDAQ:CSCO) and ONEOK, Inc. (NYSE:OKE) 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
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect CSCO to grow earnings at a 8.90% annual rate over the next 5 years. Comparatively, OKE is expected to grow at a 42.30% annual rate. All else equal, OKE’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 17.15% for ONEOK, Inc. (OKE). CSCO’s ROI is 14.20% while OKE has a ROI of 7.30%. The interpretation is that CSCO’s business generates a higher return on investment than OKE’s.Cash Flow
Cash is king when it comes to investing. On a percent-of-sales basis, CSCO’s free cash flow was 4.88% while OKE converted 0% of its revenues into cash flow. This means that, for a given level of sales, CSCO 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. CSCO has a current ratio of 2.30 compared to 0.60 for OKE. This means that CSCO can more easily cover its most immediate liabilities over the next twelve months. CSCO’s debt-to-equity ratio is 0.59 versus a D/E of 1.23 for OKE. OKE is therefore the more solvent of the two companies, and has lower financial risk.Valuation
CSCO trades at a forward P/E of 14.54, a P/B of 5.11, and a P/S of 4.53, compared to a forward P/E of 23.06, a P/B of 4.08, and a P/S of 2.13 for OKE. CSCO 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. CSCO is currently priced at a -7.52% to its one-year price target of 51.08. Comparatively, OKE is -9.06% relative to its price target of 72.53. This suggests that OKE 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. CSCO has a beta of 1.08 and OKE’s beta is 0.98. OKE’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. CSCO has a short ratio of 1.99 compared to a short interest of 3.85 for OKE. This implies that the market is currently less bearish on the outlook for CSCO.Summary
Cisco Systems, Inc. (NASDAQ:CSCO) beats ONEOK, Inc. (NYSE:OKE) on a total of 9 of the 14 factors compared between the two stocks. CSCO is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. Finally, CSCO has better sentiment signals based on short interest.