Finance

Dissecting the Numbers for Microsoft Corporation (MSFT) and Petroleo Brasileiro S.A. – Petrobras (PBR)

Microsoft Corporation (NASDAQ:MSFT) shares are up more than 26.86% this year and recently decreased -3.18% or -$3.57 to settle at $108.52. Petroleo Brasileiro S.A. – Petrobras (NYSE:PBR), on the other hand, is up 43.68% year to date as of 12/04/2018. It currently trades at $14.67 and has returned 2.30% during the past week.

Microsoft Corporation (NASDAQ:MSFT) and Petroleo Brasileiro S.A. – Petrobras (NYSE:PBR) 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

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 MSFT to grow earnings at a 13.68% annual rate over the next 5 years. Comparatively, PBR is expected to grow at a 64.40% annual rate. All else equal, PBR’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. Microsoft Corporation (MSFT) has an EBITDA margin of 36.23%. This suggests that MSFT underlying business is more profitable MSFT’s ROI is 17.60% while PBR has a ROI of 5.10%. The interpretation is that MSFT’s business generates a higher return on investment than PBR’s.

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. MSFT’s free cash flow (“FCF”) per share for the trailing twelve months was +0.88. Comparatively, PBR’s free cash flow per share was +0.14. On a percent-of-sales basis, MSFT’s free cash flow was 6.14% while PBR converted 1.03% of its revenues into cash flow. This means that, for a given level of sales, MSFT is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios are important because they reveal the financial health of a company. MSFT has a current ratio of 2.90 compared to 1.60 for PBR. This means that MSFT can more easily cover its most immediate liabilities over the next twelve months. MSFT’s debt-to-equity ratio is 0.94 versus a D/E of 1.22 for PBR. PBR is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

MSFT trades at a forward P/E of 21.56, a P/B of 9.69, and a P/S of 7.20, compared to a forward P/E of 7.06, a P/B of 1.27, and a P/S of 1.05 for PBR. MSFT is the expensive 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

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. MSFT is currently priced at a -13.29% to its one-year price target of 125.15. Comparatively, PBR is -12.68% relative to its price target of 16.80. This suggests that MSFT 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. MSFT has a beta of 1.24 and PBR’s beta is 1.62. MSFT’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. MSFT has a short ratio of 1.25 compared to a short interest of 1.41 for PBR. This implies that the market is currently less bearish on the outlook for MSFT.

Summary

Microsoft Corporation (NASDAQ:MSFT) beats Petroleo Brasileiro S.A. – Petrobras (NYSE:PBR) on a total of 10 of the 14 factors compared between the two stocks. MSFT is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. MSFT is more undervalued relative to its price target. Finally, MSFT has better sentiment signals based on short interest.

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