Earnings

Which of these 2 stocks can turn out to be absolute gem? – Tractor Supply Company (TSCO), Darden Restaurants, Inc. (DRI)

The shares of Tractor Supply Company have increased by more than 23.57% this year alone. The shares recently went down by -0.67% or -$0.62 and now trades at $92.37. The shares of Darden Restaurants, Inc. (NYSE:DRI), has jumped by 13.91% year to date as of 12/06/2018. The shares currently trade at $109.38 and have been able to report a change of -3.50% over the past one week.

The stock of Tractor Supply Company and Darden Restaurants, Inc. were two of the most active stocks on Thursday. Investors seem to be very interested in what happens to the stocks of these two companies but do investors favor one over the other? We will analyze the growth, profitability, risk, valuation, and insider trends of both companies and see which one investors prefer.

Next 5Y EPS Growth: 14.50% versus 13.20%

When a company is able to grow consistently in terms of earnings at a high compound rate have the highest likelihood of creating value for its shareholders over time. Analysts have predicted that TSCO will grow it’s earning at a 14.50% annual rate in the next 5 years. This is in contrast to DRI which will have a positive growth at a 13.20% annual rate. This means that the higher growth rate of TSCO implies a greater potential for capital appreciation over the years.

Profitability and Returns

Growth alone cannot be used to see if the company will be valuable. Shareholders will be the losers if a company invest in ventures that aren’t profitable enough to support upbeat growth. In order for us to accurately measure profitability and return, we will be using the EBITDA margin and Return on Investment (ROI), which balances the difference in capital structure. TSCO has an EBITDA margin of 11.38%, this implies that the underlying business of DRI is more profitable. The ROI of TSCO is 23.50% while that of DRI is 22.00%. These figures suggest that TSCO ventures generate a higher ROI than that of DRI.

Cash Flow



The value of a stock is ultimately determined by the amount of cash flow that the investors have available. Over the last 12 months, TSCO’s free cash flow per share is a negative -0.49, while that of DRI is positive 0.09.

Liquidity and Financial Risk

The ability of a company to meet up with its short-term obligations and be able to clear its longer-term debts is measured using Liquidity and leverage ratios. The current ratio for TSCO is 2.00 and that of DRI is 0.40. This implies that it is easier for TSCO to cover its immediate obligations over the next 12 months than DRI. The debt ratio of TSCO is 0.41 compared to 0.00 for DRI. TSCO can be able to settle its long-term debts and thus is a lower financial risk than DRI.

Valuation

TSCO currently trades at a forward P/E of 19.66, a P/B of 7.53, and a P/S of 1.45 while DRI trades at a forward P/E of 17.52, a P/B of 5.95, and a P/S of 1.67. This means that looking at the earnings, book values and sales basis, TSCO is the cheaper one. It is very obvious that earnings are the most important factors to investors, thus analysts are most likely to place their bet on the P/E.

Analyst Price Targets and Opinions




The mistake some people make is that they think a cheap stock has more value to it. In order to know the value of a stock, there is need to compare its current price to its likely trading price in the future. The price of TSCO is currently at a -4.33% to its one-year price target of 96.55. Looking at its rival pricing, DRI is at a -11.75% relative to its price target of 123.95.

When looking at the investment recommendation on say a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell), TSCO is given a 2.20 while 2.20 placed for DRI. This means that analysts are equally bullish on their outlook for the two stocks stocks.

Insider Activity and Investor Sentiment

Short interest or otherwise called the percentage of a stock’s tradable shares currently being shorted is another data that investors use to get a handle on sentiment. The short ratio for TSCO is 1.69 while that of DRI is just 4.92. This means that analysts are more bullish on the forecast for TSCO stock.

Conclusion

The stock of Tractor Supply Company defeats that of Darden Restaurants, Inc. when the two are compared, with TSCO taking 5 out of the total factors that were been considered. TSCO happens to be more profitable, generates a higher ROI, has higher cash flow per share, higher liquidity and has a lower financial risk. When looking at the stock valuation, TSCO is the cheaper one on an earnings, book value and sales basis. Finally, the sentiment signal for TSCO is better on when it is viewed on short interest.

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