Nokia Corporation (NYSE:NOK) shares are up more than 17.38% this year and recently increased 3.01% or $0.16 to settle at $5.47. Philip Morris International Inc. (NYSE:PM), on the other hand, is down -24.49% year to date as of 09/13/2018. It currently trades at $79.78 and has returned 1.48% during the past week.
Nokia Corporation (NYSE:NOK) and Philip Morris International Inc. (NYSE:PM) 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
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 NOK to grow earnings at a 16.82% annual rate over the next 5 years. Comparatively, PM is expected to grow at a 8.15% annual rate. All else equal, NOK’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 15.72% for Philip Morris International Inc. (PM). NOK’s ROI is -4.50% while PM has a ROI of 39.50%. The interpretation is that PM’s business generates a higher return on investment than NOK’s.Cash Flow
If there’s one thing investors care more about than earnings, it’s cash flow. NOK’s free cash flow (“FCF”) per share for the trailing twelve months was -0.34. Comparatively, PM’s free cash flow per share was +1.23. On a percent-of-sales basis, NOK’s free cash flow was -7.31% while PM converted 2.45% of its revenues into cash flow. This means that, for a given level of sales, PM is able to generate more free cash flow for investors.Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. NOK has a current ratio of 1.40 compared to 1.10 for PM. This means that NOK can more easily cover its most immediate liabilities over the next twelve months.Valuation
NOK trades at a forward P/E of 15.11, a P/B of 1.75, and a P/S of 1.20, compared to a forward P/E of 14.77, and a P/S of 4.08 for PM. NOK is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B 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. NOK is currently priced at a -16.87% to its one-year price target of 6.58. Comparatively, PM is -13.46% relative to its price target of 92.19. This suggests that NOK 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. NOK has a beta of 0.86 and PM’s beta is 0.84. PM’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. NOK has a short ratio of 2.12 compared to a short interest of 1.83 for PM. This implies that the market is currently less bearish on the outlook for PM.Summary
Philip Morris International Inc. (NYSE:PM) beats Nokia Corporation (NYSE:NOK) on a total of 10 of the 14 factors compared between the two stocks. PM is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, PM is the cheaper of the two stocks on an earnings and book value, Finally, PM has better sentiment signals based on short interest.