Finance

Choosing Between Entercom Communications Corp. (ETM) and MEDNAX, Inc. (MD)

Entercom Communications Corp. (NYSE:ETM) shares are down more than -40.74% this year and recently increased 0.79% or $0.05 to settle at $6.40. MEDNAX, Inc. (NYSE:MD), on the other hand, is down -26.01% year to date as of 12/06/2018. It currently trades at $39.54 and has returned -1.74% during the past week.

Entercom Communications Corp. (NYSE:ETM) and MEDNAX, Inc. (NYSE:MD) 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

Companies that can increase earnings at a high compound rate over time are attractive to investors. Comparatively, MD is expected to grow at a 13.57% annual rate. All else equal, MD’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. Entercom Communications Corp. (ETM) has an EBITDA margin of 11.01%. This suggests that ETM underlying business is more profitable ETM’s ROI is -0.70% while MD has a ROI of 6.50%. The interpretation is that MD’s business generates a higher return on investment than ETM’s.

Cash Flow



The amount of free cash flow available to investors is ultimately what determines the value of a stock. ETM’s free cash flow (“FCF”) per share for the trailing twelve months was +0.28. Comparatively, MD’s free cash flow per share was +1.41. On a percent-of-sales basis, ETM’s free cash flow was 0.01% while MD converted 3.65% of its revenues into cash flow. This means that, for a given level of sales, MD 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. ETM has a current ratio of 2.70 compared to 1.40 for MD. This means that ETM can more easily cover its most immediate liabilities over the next twelve months. ETM’s debt-to-equity ratio is 1.11 versus a D/E of 0.67 for MD. ETM is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

ETM trades at a forward P/E of 6.04, a P/B of 0.51, and a P/S of 0.70, compared to a forward P/E of 9.58, a P/B of 1.19, and a P/S of 0.97 for MD. ETM 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”. ETM is currently priced at a -23.63% to its one-year price target of 8.38. Comparatively, MD is -11.68% relative to its price target of 44.77. This suggests that ETM is the better investment over the next year.

Risk and Volatility

No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. ETM has a beta of 0.89 and MD’s beta is 0.32. MD’s shares are therefore the less volatile of the two stocks.

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. ETM has a short ratio of 13.59 compared to a short interest of 2.73 for MD. This implies that the market is currently less bearish on the outlook for MD.

Summary

MEDNAX, Inc. (NYSE:MD) beats Entercom Communications Corp. (NYSE:ETM) on a total of 7 of the 14 factors compared between the two stocks. MD is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, ETM is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, MD has better sentiment signals based on short interest.

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