Altria Group, Inc. (NYSE:MO) shares are down more than -23.82% this year and recently decreased -2.39% or -$1.33 to settle at $54.40. Mondelez International, Inc. (NASDAQ:MDLZ), on the other hand, is up 3.90% year to date as of 12/04/2018. It currently trades at $44.47 and has returned -0.16% during the past week.
Altria Group, Inc. (NYSE:MO) and Mondelez International, Inc. (NASDAQ:MDLZ) are the two most active stocks based on recent 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
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect MO to grow earnings at a 9.71% annual rate over the next 5 years. Comparatively, MDLZ is expected to grow at a 8.16% annual rate. All else equal, MO’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 15.62% for Mondelez International, Inc. (MDLZ). MO’s ROI is 24.00% while MDLZ has a ROI of 6.30%. The interpretation is that MO’s business generates a higher return on investment than MDLZ’s.Cash Flow
The amount of free cash flow available to investors is ultimately what determines the value of a stock. MO’s free cash flow (“FCF”) per share for the trailing twelve months was +0.71. Comparatively, MDLZ’s free cash flow per share was +0.07. On a percent-of-sales basis, MO’s free cash flow was 5.22% while MDLZ converted 0.39% of its revenues into cash flow. This means that, for a given level of sales, MO 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. MO has a current ratio of 0.60 compared to 0.60 for MDLZ. This means that MO can more easily cover its most immediate liabilities over the next twelve months. MO’s debt-to-equity ratio is 0.90 versus a D/E of 0.79 for MDLZ. MO is therefore the more solvent of the two companies, and has lower financial risk.Valuation
MO trades at a forward P/E of 12.59, a P/B of 6.61, and a P/S of 4.11, compared to a forward P/E of 17.65, a P/B of 2.56, and a P/S of 2.49 for MDLZ. MO 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. MO is currently priced at a -17.35% to its one-year price target of 65.82. Comparatively, MDLZ is -8.46% relative to its price target of 48.58. This suggests that MO 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. MO has a beta of 0.43 and MDLZ’s beta is 0.78. MO’s shares are therefore the less volatile of the two stocks.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. MO has a short ratio of 2.59 compared to a short interest of 1.70 for MDLZ. This implies that the market is currently less bearish on the outlook for MDLZ.Summary
Altria Group, Inc. (NYSE:MO) beats Mondelez International, Inc. (NASDAQ:MDLZ) on a total of 9 of the 14 factors compared between the two stocks. MO 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 higher liquidity. MO is more undervalued relative to its price target. Finally, SYK has better sentiment signals based on short interest.