Hewlett Packard Enterprise Company (NYSE:HPE) shares are up more than 15.18% this year and recently increased 0.85% or $0.14 to settle at $16.54. Telefonaktiebolaget LM Ericsson (publ) (NASDAQ:ERIC), on the other hand, is up 28.89% year to date as of 09/13/2018. It currently trades at $8.61 and has returned 0.12% during the past week.
Hewlett Packard Enterprise Company (NYSE:HPE) and Telefonaktiebolaget LM Ericsson (publ) (NASDAQ:ERIC) are the two most active stocks in the Communication Equipment 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
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect HPE to grow earnings at a -7.77% annual rate over the next 5 years.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. Hewlett Packard Enterprise Company (HPE) has an EBITDA margin of 8.38%. This suggests that HPE underlying business is more profitable HPE’s ROI is 2.10% while ERIC has a ROI of -23.60%. The interpretation is that HPE’s business generates a higher return on investment than ERIC’s.Cash Flow
Earnings don’t always accurately reflect the amount of cash that a company brings in. HPE’s free cash flow (“FCF”) per share for the trailing twelve months was +0.20. Comparatively, ERIC’s free cash flow per share was -0.85. On a percent-of-sales basis, HPE’s free cash flow was 1.02% while ERIC converted -12.01% of its revenues into cash flow. This means that, for a given level of sales, HPE is able to generate more free cash flow for investors.Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. HPE has a current ratio of 1.00 compared to 1.50 for ERIC. This means that ERIC can more easily cover its most immediate liabilities over the next twelve months. HPE’s debt-to-equity ratio is 0.52 versus a D/E of 0.36 for ERIC. HPE is therefore the more solvent of the two companies, and has lower financial risk.Valuation
HPE trades at a forward P/E of 10.51, a P/B of 1.07, and a P/S of 0.88, compared to a forward P/E of 24.81, a P/B of 2.79, and a P/S of 1.32 for ERIC. HPE is the cheaper of the two stocks on an earnings, book value and sales basis. 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. HPE is currently priced at a -14.43% to its one-year price target of 19.33. Comparatively, ERIC is 6.3% relative to its price target of 8.10. This suggests that HPE is the better investment over the next year.
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. HPE has a short ratio of 2.68 compared to a short interest of 4.05 for ERIC. This implies that the market is currently less bearish on the outlook for HPE.Summary
Hewlett Packard Enterprise Company (NYSE:HPE) beats Telefonaktiebolaget LM Ericsson (publ) (NASDAQ:ERIC) on a total of 11 of the 14 factors compared between the two stocks. HPE is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, HPE is the cheaper of the two stocks on an earnings, book value and sales basis, HPE is more undervalued relative to its price target. Finally, HPE has better sentiment signals based on short interest.