Illinois Tool Works Inc. (NYSE:ITW) shares are down more than -20.13% this year and recently increased 0.38% or $0.5 to settle at $133.26. Diebold Nixdorf, Incorporated (NYSE:DBD), on the other hand, is down -82.51% year to date as of 12/06/2018. It currently trades at $2.86 and has returned -17.34% during the past week.
Illinois Tool Works Inc. (NYSE:ITW) and Diebold Nixdorf, Incorporated (NYSE:DBD) 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
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect ITW to grow earnings at a 11.76% annual rate over the next 5 years. Comparatively, DBD is expected to grow at a 7.00% annual rate. All else equal, ITW’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. Illinois Tool Works Inc. (ITW) has an EBITDA margin of 26.35%. This suggests that ITW underlying business is more profitable ITW’s ROI is 19.90% while DBD has a ROI of -1.40%. The interpretation is that ITW’s business generates a higher return on investment than DBD’s.Cash Flow
Earnings don’t always accurately reflect the amount of cash that a company brings in. ITW’s free cash flow (“FCF”) per share for the trailing twelve months was +1.43. Comparatively, DBD’s free cash flow per share was -1.65. On a percent-of-sales basis, ITW’s free cash flow was 3.31% while DBD converted -2.73% of its revenues into cash flow. This means that, for a given level of sales, ITW is able to generate more free cash flow for investors.Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. ITW has a current ratio of 1.60 compared to 1.50 for DBD. This means that ITW can more easily cover its most immediate liabilities over the next twelve months.Valuation
ITW trades at a forward P/E of 16.42, a P/B of 12.54, and a P/S of 3.00, compared to a P/S of 0.05 for DBD. ITW 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
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. ITW is currently priced at a -2.93% to its one-year price target of 137.28. Comparatively, DBD is -42.8% relative to its price target of 5.00. This suggests that DBD is the better investment over the next year.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. ITW has a beta of 1.28 and DBD’s beta is 1.62. ITW’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. ITW has a short ratio of 2.79 compared to a short interest of 11.61 for DBD. This implies that the market is currently less bearish on the outlook for ITW.Summary
Illinois Tool Works Inc. (NYSE:ITW) beats Diebold Nixdorf, Incorporated (NYSE:DBD) on a total of 9 of the 14 factors compared between the two stocks. ITW is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. Finally, ITW has better sentiment signals based on short interest.