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Critical Comparison: General Electric Company (GE) vs. Cardinal Health, Inc. (CAH)

General Electric Company (NYSE:GE) shares are down more than -27.16% this year and recently increased 0.79% or $0.1 to settle at $12.71. Cardinal Health, Inc. (NYSE:CAH), on the other hand, is down -13.60% year to date as of 09/13/2018. It currently trades at $52.94 and has returned 1.59% during the past week.

General Electric Company (NYSE:GE) and Cardinal Health, Inc. (NYSE:CAH) are the two most active stocks in the Diversified Machinery 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 GE to grow earnings at a 6.17% annual rate over the next 5 years. Comparatively, CAH is expected to grow at a 4.94% annual rate. All else equal, GE’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 0.83% for Cardinal Health, Inc. (CAH). GE’s ROI is -0.90% while CAH has a ROI of -1.90%. The interpretation is that GE’s business generates a higher return on investment than CAH’s.

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. GE’s free cash flow (“FCF”) per share for the trailing twelve months was -0.25. Comparatively, CAH’s free cash flow per share was +0.87. On a percent-of-sales basis, GE’s free cash flow was -1.78% while CAH converted 0.2% of its revenues into cash flow. This means that, for a given level of sales, CAH is able to generate more free cash flow for investors.

Liquidity and Financial Risk

GE’s debt-to-equity ratio is 2.10 versus a D/E of 1.49 for CAH. GE is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

GE trades at a forward P/E of 12.56, a P/B of 2.00, and a P/S of 0.91, compared to a forward P/E of 9.71, a P/B of 2.71, and a P/S of 0.12 for CAH. GE is the cheaper of the two stocks on book value basis but is expensive in terms of P/E 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

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. GE is currently priced at a -24.75% to its one-year price target of 16.89. Comparatively, CAH is -2.68% relative to its price target of 54.40. This suggests that GE is the better investment over the next year.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. GE has a beta of 0.97 and CAH’s beta is 1.05. GE’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. GE has a short ratio of 2.05 compared to a short interest of 3.29 for CAH. This implies that the market is currently less bearish on the outlook for GE.

Summary




General Electric Company (NYSE:GE) beats Cardinal Health, Inc. (NYSE:CAH) on a total of 7 of the 14 factors compared between the two stocks. GE is growing fastly, is more profitable and generates a higher return on investment. GE is more undervalued relative to its price target. Finally, GE has better sentiment signals based on short interest.

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