Gerdau S.A. (NYSE:GGB) shares are up more than 10.71% this year and recently decreased -3.33% or -$0.14 to settle at $4.06. The Williams Companies, Inc. (NYSE:WMB), on the other hand, is down -17.84% year to date as of 12/04/2018. It currently trades at $25.05 and has returned 0.24% during the past week.
Gerdau S.A. (NYSE:GGB) and The Williams Companies, Inc. (NYSE:WMB) are the two most active stocks based on recent trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.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 GGB to grow earnings at a 25.43% annual rate over the next 5 years. Comparatively, WMB is expected to grow at a 8.00% annual rate. All else equal, GGB’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. 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 38.79% for The Williams Companies, Inc. (WMB). GGB’s ROI is 1.90% while WMB has a ROI of 3.10%. The interpretation is that WMB’s business generates a higher return on investment than GGB’s.Cash Flow
The value of a stock is simply the present value of its future free cash flows. GGB’s free cash flow (“FCF”) per share for the trailing twelve months was -0.08. Comparatively, WMB’s free cash flow per share was -0.42. On a percent-of-sales basis, GGB’s free cash flow was -1.19% while WMB converted -6.33% of its revenues into cash flow. This means that, for a given level of sales, GGB 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. GGB has a current ratio of 2.40 compared to 0.70 for WMB. This means that GGB can more easily cover its most immediate liabilities over the next twelve months. GGB’s debt-to-equity ratio is 0.72 versus a D/E of 1.43 for WMB. WMB is therefore the more solvent of the two companies, and has lower financial risk.Valuation
GGB trades at a forward P/E of 8.69, a P/B of 1.00, and a P/S of 0.54, compared to a forward P/E of 24.34, a P/B of 1.65, and a P/S of 3.51 for WMB. GGB 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. GGB is currently priced at a -29.76% to its one-year price target of 5.78. Comparatively, WMB is -23.98% relative to its price target of 32.95. This suggests that GGB is the better investment over the next year.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. GGB has a beta of 2.23 and WMB’s beta is 1.60. WMB’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. GGB has a short ratio of 7.01 compared to a short interest of 3.43 for WMB. This implies that the market is currently less bearish on the outlook for WMB.Summary
Gerdau S.A. (NYSE:GGB) beats The Williams Companies, Inc. (NYSE:WMB) on a total of 10 of the 14 factors compared between the two stocks. GGB is growing fastly, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, GGB is the cheaper of the two stocks on an earnings, book value and sales basis, GGB is more undervalued relative to its price target. Finally, CNI has better sentiment signals based on short interest.