Finance

A Side-by-side Analysis of Hexcel Corporation (HXL) and Shell Midstream Partners, L.P. (SHLX)

Hexcel Corporation (NYSE:HXL) shares are down more than -3.06% this year and recently decreased -0.20% or -$0.12 to settle at $59.96. Shell Midstream Partners, L.P. (NYSE:SHLX), on the other hand, is down -32.49% year to date as of 12/06/2018. It currently trades at $20.13 and has returned 6.62% during the past week.

Hexcel Corporation (NYSE:HXL) and Shell Midstream Partners, L.P. (NYSE:SHLX) 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

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect HXL to grow earnings at a 11.18% annual rate over the next 5 years. Comparatively, SHLX is expected to grow at a 10.97% annual rate. All else equal, HXL’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 96.49% for Shell Midstream Partners, L.P. (SHLX). HXL’s ROI is 12.40% while SHLX has a ROI of 4.80%. The interpretation is that HXL’s business generates a higher return on investment than SHLX’s.

Cash Flow



The value of a stock is simply the present value of its future free cash flows. HXL’s free cash flow (“FCF”) per share for the trailing twelve months was +0.68. Comparatively, SHLX’s free cash flow per share was +0.16. On a percent-of-sales basis, HXL’s free cash flow was 2.97% while SHLX converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, HXL is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. HXL has a current ratio of 2.60 compared to 4.60 for SHLX. This means that SHLX can more easily cover its most immediate liabilities over the next twelve months. HXL’s debt-to-equity ratio is 0.72 versus a D/E of 0.65 for SHLX. HXL is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

HXL trades at a forward P/E of 17.45, a P/B of 3.81, and a P/S of 2.44, compared to a forward P/E of 10.50, a P/B of 1.39, and a P/S of 7.93 for SHLX. HXL is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B 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. HXL is currently priced at a -14.9% to its one-year price target of 70.46. Comparatively, SHLX is -22.43% relative to its price target of 25.95. This suggests that SHLX is the better investment over the next year.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. HXL has a beta of 1.18 and SHLX’s beta is 1.11. SHLX’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. HXL has a short ratio of 3.68 compared to a short interest of 3.07 for SHLX. This implies that the market is currently less bearish on the outlook for SHLX.

Summary

Shell Midstream Partners, L.P. (NYSE:SHLX) beats Hexcel Corporation (NYSE:HXL) on a total of 9 of the 14 factors compared between the two stocks. SHLX is growing fastly, higher liquidity and has lower financial risk. In terms of valuation, SHLX is the cheaper of the two stocks on an earnings and book value, SHLX is more undervalued relative to its price target. Finally, SHLX has better sentiment signals based on short interest.

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