Global

Should You Buy Ambev S.A. (ABEV) or Twitter, Inc. (TWTR)?

Ambev S.A. (NYSE:ABEV) shares are down more than -32.20% this year and recently decreased -1.79% or -$0.08 to settle at $4.38. Twitter, Inc. (NYSE:TWTR), on the other hand, is up 26.57% year to date as of 09/13/2018. It currently trades at $30.39 and has returned -1.36% during the past week.

Ambev S.A. (NYSE:ABEV) and Twitter, Inc. (NYSE:TWTR) are the two most active stocks in the Beverages – Brewers industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

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 ABEV to grow earnings at a 23.65% annual rate over the next 5 years. Comparatively, TWTR is expected to grow at a 32.40% annual rate. All else equal, TWTR’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. EBITDA margin of 20.79% for Twitter, Inc. (TWTR).

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. ABEV’s free cash flow (“FCF”) per share for the trailing twelve months was +0.14. Comparatively, TWTR’s free cash flow per share was +0.16. On a percent-of-sales basis, ABEV’s free cash flow was 14.58% while TWTR converted 4.97% of its revenues into cash flow. This means that, for a given level of sales, ABEV is able to generate more free cash flow for investors.

Valuation

ABEV trades at a forward P/E of 17.52, a P/B of 5.01, and a P/S of 5.28, compared to a forward P/E of 38.32, a P/B of 4.11, and a P/S of 8.63 for TWTR. 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 isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. ABEV is currently priced at a -29.13% to its one-year price target of 6.18. Comparatively, TWTR is -10.27% relative to its price target of 33.87. This suggests that ABEV is the better investment over the next year.

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. ABEV has a short ratio of 0.57 compared to a short interest of 1.86 for TWTR. This implies that the market is currently less bearish on the outlook for ABEV.

Summary

Ambev S.A. (NYSE:ABEV) beats Twitter, Inc. (NYSE:TWTR) on a total of 8 of the 14 factors compared between the two stocks. ABEV has a higher cash conversion rate and has lower financial risk. In terms of valuation, ABEV is the cheaper of the two stocks on an earnings and sales basis, ABEV is more undervalued relative to its price target. Finally, ABEV has better sentiment signals based on short interest.

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