Westinghouse Air Brake Technologies Corporation (NYSE:WAB) shares are up more than 8.47% this year and recently decreased -0.73% or -$0.65 to settle at $88.33. Knowles Corporation (NYSE:KN), on the other hand, is down -0.82% year to date as of 12/06/2018. It currently trades at $14.54 and has returned -2.09% during the past week.
Westinghouse Air Brake Technologies Corporation (NYSE:WAB) and Knowles Corporation (NYSE:KN) 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
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 WAB to grow earnings at a 15.00% annual rate over the next 5 years. Comparatively, KN is expected to grow at a 15.00% annual rate. All else equal, All else equal, the two stocks’ identical expected growth rates would imply a similar 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., compared to an EBITDA margin of 10.57% for Knowles Corporation (KN). WAB’s ROI is 7.80% while KN has a ROI of 3.40%. The interpretation is that WAB’s business generates a higher return on investment than KN’s.Cash Flow
The amount of free cash flow available to investors is ultimately what determines the value of a stock. WAB’s free cash flow (“FCF”) per share for the trailing twelve months was -0.68. Comparatively, KN’s free cash flow per share was +0.22. On a percent-of-sales basis, WAB’s free cash flow was -1.69% while KN converted 0% of its revenues into cash flow. This means that, for a given level of sales, KN 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. WAB has a current ratio of 2.80 compared to 2.60 for KN. This means that WAB can more easily cover its most immediate liabilities over the next twelve months. WAB’s debt-to-equity ratio is 1.34 versus a D/E of 0.00 for KN. WAB is therefore the more solvent of the two companies, and has lower financial risk.Valuation
WAB trades at a forward P/E of 19.66, a P/B of 2.94, and a P/S of 1.93, compared to a forward P/E of 13.04, a P/B of 1.17, and a P/S of 1.77 for KN. WAB 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. WAB is currently priced at a -20.42% to its one-year price target of 111.00. Comparatively, KN is -16% relative to its price target of 17.31. This suggests that WAB is the better investment over the next year.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. WAB has a beta of 1.16 and KN’s beta is 0.90. KN’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. WAB has a short ratio of 6.47 compared to a short interest of 10.80 for KN. This implies that the market is currently less bearish on the outlook for WAB.Summary
Knowles Corporation (NYSE:KN) beats Westinghouse Air Brake Technologies Corporation (NYSE:WAB) on a total of 7 of the 14 factors compared between the two stocks. KN is more profitable, has a higher cash conversion rate and has lower financial risk. In terms of valuation, KN is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, ATHN has better sentiment signals based on short interest.