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Critical Comparison: Vale S.A. (VALE) vs. Capital One Financial Corporation (COF)

Vale S.A. (NYSE:VALE) shares are up more than 8.90% this year and recently decreased -0.62% or -$0.08 to settle at $12.84. Capital One Financial Corporation (NYSE:COF), on the other hand, is down -2.59% year to date as of 09/13/2018. It currently trades at $97.00 and has returned -1.17% during the past week.

Vale S.A. (NYSE:VALE) and Capital One Financial Corporation (NYSE:COF) are the two most active stocks in the Industrial Metals & Minerals 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

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 VALE to grow earnings at a 18.42% annual rate over the next 5 years. Comparatively, COF is expected to grow at a 11.85% annual rate. All else equal, VALE’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 60.6% for Capital One Financial Corporation (COF). VALE’s ROI is 13.70% while COF has a ROI of 13.30%. The interpretation is that VALE’s business generates a higher return on investment than COF’s.

Cash Flow



The value of a stock is simply the present value of its future free cash flows. VALE’s free cash flow (“FCF”) per share for the trailing twelve months was +2.09. Comparatively, COF’s free cash flow per share was +6.56. On a percent-of-sales basis, VALE’s free cash flow was 32.1% while COF converted 10.46% of its revenues into cash flow. This means that, for a given level of sales, VALE is able to generate more free cash flow for investors.

Liquidity and Financial Risk

VALE’s debt-to-equity ratio is 0.43 versus a D/E of 1.06 for COF. COF is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

VALE trades at a forward P/E of 7.91, a P/B of 1.67, and a P/S of 2.37, compared to a forward P/E of 8.65, a P/B of 0.94, and a P/S of 1.76 for COF. VALE 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

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. VALE is currently priced at a -17.16% to its one-year price target of 15.50. Comparatively, COF is -15.97% relative to its price target of 115.43. This suggests that VALE is the better investment over the next year.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. VALE has a beta of 1.70 and COF’s beta is 1.27. COF’s shares are therefore the less volatile of the two stocks.

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. VALE has a short ratio of 2.42 compared to a short interest of 1.73 for COF. This implies that the market is currently less bearish on the outlook for COF.

Summary




Capital One Financial Corporation (NYSE:COF) beats Vale S.A. (NYSE:VALE) on a total of 7 of the 14 factors compared between the two stocks. COF is growing fastly and has higher cash flow per share. In terms of valuation, COF is the cheaper of the two stocks on book value and sales basis, Finally, COF has better sentiment signals based on short interest.

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