KB Home (NYSE:KBH) shares are down more than -35.59% this year and recently increased 2.80% or $0.56 to settle at $20.58. AECOM (NYSE:ACM), on the other hand, is down -20.75% year to date as of 12/06/2018. It currently trades at $29.44 and has returned -6.78% during the past week.
KB Home (NYSE:KBH) and AECOM (NYSE:ACM) are the two most active stocks based on recent trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.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 KBH to grow earnings at a 18.56% annual rate over the next 5 years. Comparatively, ACM is expected to grow at a 4.96% annual rate. All else equal, KBH’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. , compared to an EBITDA margin of 3.54% for AECOM (ACM). KBH’s ROI is 4.30% while ACM has a ROI of 5.10%. The interpretation is that ACM’s business generates a higher return on investment than KBH’s.Cash Flow
If there’s one thing investors care more about than earnings, it’s cash flow. KBH’s free cash flow (“FCF”) per share for the trailing twelve months was -0.24. Comparatively, ACM’s free cash flow per share was +3.14. On a percent-of-sales basis, KBH’s free cash flow was -0.49% while ACM converted 2.44% of its revenues into cash flow. This means that, for a given level of sales, ACM is able to generate more free cash flow for investors.Liquidity and Financial Risk
KBH’s debt-to-equity ratio is 1.02 versus a D/E of 0.89 for ACM. KBH is therefore the more solvent of the two companies, and has lower financial risk.
KBH trades at a forward P/E of 6.94, a P/B of 0.90, and a P/S of 0.40, compared to a forward P/E of 9.39, a P/B of 1.14, and a P/S of 0.23 for ACM. 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”. KBH is currently priced at a -11.02% to its one-year price target of 23.13. Comparatively, ACM is -17.6% relative to its price target of 35.73. This suggests that ACM 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. KBH has a beta of 1.53 and ACM’s beta is 1.63. KBH’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. KBH has a short ratio of 1.84 compared to a short interest of 7.42 for ACM. This implies that the market is currently less bearish on the outlook for KBH.Summary
AECOM (NYSE:ACM) beats KB Home (NYSE:KBH) on a total of 8 of the 14 factors compared between the two stocks. ACM is growing fastly, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. ACM is more undervalued relative to its price target. Finally, PACW has better sentiment signals based on short interest.