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A Side-by-side Analysis of Switch, Inc. (SWCH) and WildHorse Resource Development Corporation (WRD)

Switch, Inc. (NYSE:SWCH) shares are down more than -59.65% this year and recently increased 0.96% or $0.07 to settle at $7.34. WildHorse Resource Development Corporation (NYSE:WRD), on the other hand, is down -4.94% year to date as of 12/06/2018. It currently trades at $17.50 and has returned -7.75% during the past week.

Switch, Inc. (NYSE:SWCH) and WildHorse Resource Development Corporation (NYSE:WRD) are the two most active stocks based on recent trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect SWCH to grow earnings at a 22.19% annual rate over the next 5 years. Comparatively, WRD is expected to grow at a 50.00% annual rate. All else equal, WRD’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 2.06% for WildHorse Resource Development Corporation (WRD). SWCH’s ROI is 2.20% while WRD has a ROI of 5.30%. The interpretation is that WRD’s business generates a higher return on investment than SWCH’s.

Cash Flow



Earnings don’t always accurately reflect the amount of cash that a company brings in. SWCH’s free cash flow (“FCF”) per share for the trailing twelve months was -0.32. Comparatively, WRD’s free cash flow per share was -1.57. On a percent-of-sales basis, SWCH’s free cash flow was -0.02% while WRD converted -0.04% of its revenues into cash flow. This means that, for a given level of sales, SWCH is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. SWCH has a current ratio of 1.50 compared to 0.30 for WRD. This means that SWCH can more easily cover its most immediate liabilities over the next twelve months. SWCH’s debt-to-equity ratio is 4.68 versus a D/E of 1.06 for WRD. SWCH is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

SWCH trades at a forward P/E of 45.31, a P/B of 2.87, and a P/S of 4.58, compared to a forward P/E of 7.33, a P/B of 1.70, and a P/S of 2.09 for WRD. SWCH 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

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”. SWCH is currently priced at a -37% to its one-year price target of 11.65. Comparatively, WRD is -42.55% relative to its price target of 30.46. This suggests that WRD is the better investment over the next year.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. SWCH has a short ratio of 5.80 compared to a short interest of 3.49 for WRD. This implies that the market is currently less bearish on the outlook for WRD.

Summary




WildHorse Resource Development Corporation (NYSE:WRD) beats Switch, Inc. (NYSE:SWCH) on a total of 9 of the 14 factors compared between the two stocks. WRD has higher cash flow per share, is more profitable, generates a higher return on investment and has lower financial risk. In terms of valuation, WRD is the cheaper of the two stocks on an earnings, book value and sales basis, WRD is more undervalued relative to its price target. Finally, WRD has better sentiment signals based on short interest.

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