Should You Buy Tapestry, Inc. (TPR) or U.S. Silica Holdings, Inc. (SLCA)?

Tapestry, Inc. (NYSE:TPR) shares are down more than -22.03% this year and recently decreased -3.92% or -$1.07 to settle at $26.32. U.S. Silica Holdings, Inc. (NYSE:SLCA), on the other hand, is up 25.05% year to date as of 08/12/2019. It currently trades at $12.73 and has returned 13.76% during the past week.

Tapestry, Inc. (NYSE:TPR) and U.S. Silica Holdings, Inc. (NYSE:SLCA) are the two most active stocks in the Textile – Apparel Footwear & Accessories industry based on today’s 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 increase earnings at a high compound rate over time are attractive to investors. Analysts expect TPR to grow earnings at a 6.03% annual rate over the next 5 years.

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. Tapestry, Inc. (TPR) has an EBITDA margin of 13.86%. This suggests that TPR underlying business is more profitable TPR’s ROI is 13.20% while SLCA has a ROI of -5.80%. The interpretation is that TPR’s business generates a higher return on investment than SLCA’s.

Cash Flow

The amount of free cash flow available to investors is ultimately what determines the value of a stock. TPR’s free cash flow (“FCF”) per share for the trailing twelve months was -0.56. Comparatively, SLCA’s free cash flow per share was +0.45. On a percent-of-sales basis, TPR’s free cash flow was -2.76% while SLCA converted 2.1% of its revenues into cash flow. This means that, for a given level of sales, SLCA is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios are important because they reveal the financial health of a company. TPR has a current ratio of 2.70 compared to 1.80 for SLCA. This means that TPR can more easily cover its most immediate liabilities over the next twelve months. TPR’s debt-to-equity ratio is 0.45 versus a D/E of 1.22 for SLCA. SLCA is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

TPR trades at a forward P/E of 9.22, a P/B of 2.16, and a P/S of 1.32, compared to a forward P/E of 28.10, a P/B of 0.92, and a P/S of 0.59 for SLCA. TPR is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S ratio. 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. TPR is currently priced at a -38.22% to its one-year price target of 42.60. Comparatively, SLCA is -20.69% relative to its price target of 16.05. This suggests that TPR 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. TPR has a beta of 0.91 and SLCA’s beta is 2.54. TPR’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. TPR has a short ratio of 2.41 compared to a short interest of 8.51 for SLCA. This implies that the market is currently less bearish on the outlook for TPR.

Summary

Tapestry, Inc. (NYSE:TPR) beats U.S. Silica Holdings, Inc. (NYSE:SLCA) on a total of 10 of the 14 factors compared between the two stocks. TPR is growing fastly, is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. TPR is more undervalued relative to its price target. Finally, TPR has better sentiment signals based on short interest.