Spirit Realty Capital, Inc. (NYSE:SRC) shares are up more than 0.93% this year and recently increased 0.91% or $0.07 to settle at $7.76. Teva Pharmaceutical Industries Limited (NYSE:TEVA), on the other hand, is up 8.44% year to date as of 12/04/2018. It currently trades at $20.55 and has returned -5.73% during the past week.
Spirit Realty Capital, Inc. (NYSE:SRC) and Teva Pharmaceutical Industries Limited (NYSE:TEVA) are the two most active stocks based on recent 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
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 SRC to grow earnings at a 37.47% annual rate over the next 5 years. Comparatively, TEVA is expected to grow at a -7.44% annual rate. All else equal, SRC’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. Spirit Realty Capital, Inc. (SRC) has an EBITDA margin of 95.46%. This suggests that SRC underlying business is more profitable SRC’s ROI is 0.20% while TEVA has a ROI of -36.00%. The interpretation is that SRC’s business generates a higher return on investment than TEVA’s.Cash Flow
The value of a stock is simply the present value of its future free cash flows. SRC’s free cash flow (“FCF”) per share for the trailing twelve months was -0.03. Comparatively, TEVA’s free cash flow per share was +1.08. On a percent-of-sales basis, SRC’s free cash flow was -0% while TEVA converted 4.91% of its revenues into cash flow. This means that, for a given level of sales, TEVA is able to generate more free cash flow for investors.Liquidity and Financial Risk
SRC’s debt-to-equity ratio is 0.78 versus a D/E of 2.12 for TEVA. TEVA is therefore the more solvent of the two companies, and has lower financial risk.
SRC trades at a forward P/E of 27.71, a P/B of 1.25, and a P/S of 6.88, compared to a forward P/E of 7.22, a P/B of 1.50, and a P/S of 1.07 for TEVA. SRC 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
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. SRC is currently priced at a -17.53% to its one-year price target of 9.41. Comparatively, TEVA is -11.38% relative to its price target of 23.19. This suggests that SRC 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. SRC has a beta of 0.41 and TEVA’s beta is 0.73. SRC’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. SRC has a short ratio of 1.04 compared to a short interest of 3.07 for TEVA. This implies that the market is currently less bearish on the outlook for SRC.Summary
Spirit Realty Capital, Inc. (NYSE:SRC) beats Teva Pharmaceutical Industries Limited (NYSE:TEVA) on a total of 9 of the 14 factors compared between the two stocks. SRC is growing fastly, is more profitable, generates a higher return on investment and has lower financial risk. SRC is more undervalued relative to its price target. Finally, SRC has better sentiment signals based on short interest.