Sirius XM Holdings Inc. (NASDAQ:SIRI) shares are up more than 17.54% this year and recently decreased -0.63% or -$0.04 to settle at $6.30. Merck & Co., Inc. (NYSE:MRK), on the other hand, is up 33.43% year to date as of 11/07/2018. It currently trades at $75.08 and has returned 2.00% during the past week.
Sirius XM Holdings Inc. (NASDAQ:SIRI) and Merck & Co., Inc. (NYSE:MRK) are the two most active stocks in the Broadcasting – Radio industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.Growth
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect SIRI to grow earnings at a 22.29% annual rate over the next 5 years. Comparatively, MRK is expected to grow at a 9.54% annual rate. All else equal, SIRI’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 24.61% for Merck & Co., Inc. (MRK). SIRI’s ROI is 22.30% while MRK has a ROI of 8.70%. The interpretation is that SIRI’s business generates a higher return on investment than MRK’s.Cash Flow
The value of a stock is simply the present value of its future free cash flows. SIRI’s free cash flow (“FCF”) per share for the trailing twelve months was +0.05. Comparatively, MRK’s free cash flow per share was -. On a percent-of-sales basis, SIRI’s free cash flow was 4.13% while MRK converted 0% of its revenues into cash flow. This means that, for a given level of sales, SIRI 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. SIRI has a current ratio of 0.20 compared to 1.30 for MRK. This means that MRK can more easily cover its most immediate liabilities over the next twelve months.Valuation
SIRI trades at a forward P/E of 22.74, and a P/S of 4.93, compared to a forward P/E of 15.95, a P/B of 6.19, and a P/S of 4.84 for MRK. SIRI 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. SIRI is currently priced at a -8.16% to its one-year price target of 6.86. Comparatively, MRK is -5.11% relative to its price target of 79.12. This suggests that SIRI is the better investment over the next year.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. SIRI has a beta of 1.05 and MRK’s beta is 0.72. MRK’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. SIRI has a short ratio of 8.17 compared to a short interest of 1.82 for MRK. This implies that the market is currently less bearish on the outlook for MRK.Summary
Sirius XM Holdings Inc. (NASDAQ:SIRI) beats Merck & Co., Inc. (NYSE:MRK) on a total of 8 of the 14 factors compared between the two stocks. SIRI is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. SIRI is more undervalued relative to its price target. Finally, YUM has better sentiment signals based on short interest.