ResMed Inc. (NYSE:RMD) shares are up more than 32.66% this year and recently increased 0.20% or $0.22 to settle at $112.35. II-VI Incorporated (NASDAQ:IIVI), on the other hand, is down -25.52% year to date as of 12/06/2018. It currently trades at $34.97 and has returned -6.07% during the past week.
ResMed Inc. (NYSE:RMD) and II-VI Incorporated (NASDAQ:IIVI) 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
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 RMD to grow earnings at a 7.64% annual rate over the next 5 years. Comparatively, IIVI is expected to grow at a 20.63% annual rate. All else equal, IIVI’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 19.15% for II-VI Incorporated (IIVI). RMD’s ROI is 19.80% while IIVI has a ROI of 7.10%. The interpretation is that RMD’s business generates a higher return on investment than IIVI’s.Cash Flow
Earnings don’t always accurately reflect the amount of cash that a company brings in. RMD’s free cash flow (“FCF”) per share for the trailing twelve months was -0.12. Comparatively, IIVI’s free cash flow per share was -0.26. On a percent-of-sales basis, RMD’s free cash flow was -0.73% while IIVI converted -1.43% of its revenues into cash flow. This means that, for a given level of sales, RMD is able to generate more free cash flow for investors.Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. RMD has a current ratio of 2.60 compared to 3.60 for IIVI. This means that IIVI can more easily cover its most immediate liabilities over the next twelve months. RMD’s debt-to-equity ratio is 0.28 versus a D/E of 0.54 for IIVI. IIVI is therefore the more solvent of the two companies, and has lower financial risk.Valuation
RMD trades at a forward P/E of 27.12, a P/B of 8.43, and a P/S of 6.58, compared to a forward P/E of 11.26, a P/B of 2.12, and a P/S of 1.79 for IIVI. RMD 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. RMD is currently priced at a 7.2% to its one-year price target of 104.80. Comparatively, IIVI is -30.31% relative to its price target of 50.18. This suggests that IIVI 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. RMD has a beta of 1.00 and IIVI’s beta is 0.69. IIVI’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. RMD has a short ratio of 3.29 compared to a short interest of 6.88 for IIVI. This implies that the market is currently less bearish on the outlook for RMD.Summary
II-VI Incorporated (NASDAQ:IIVI) beats ResMed Inc. (NYSE:RMD) on a total of 8 of the 14 factors compared between the two stocks. IIVI is more profitable and higher liquidity. In terms of valuation, IIVI is the cheaper of the two stocks on an earnings, book value and sales basis, IIVI is more undervalued relative to its price target. Finally, AEM has better sentiment signals based on short interest.