Comparing Rio Tinto Group (RIO) and BlackRock, Inc. (BLK)

Rio Tinto Group (NYSE:RIO) shares are up more than 8.86% this year and recently increased 2.50% or $1.22 to settle at $50.01. BlackRock, Inc. (NYSE:BLK), on the other hand, is up 8.28% year to date as of 08/13/2019. It currently trades at $425.33 and has returned -2.38% during the past week.

Rio Tinto Group (NYSE:RIO) and BlackRock, Inc. (NYSE:BLK) are the two most active stocks in the Industrial Metals & Minerals industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

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 RIO to grow earnings at a -7.10% annual rate over the next 5 years. Comparatively, BLK is expected to grow at a 5.24% annual rate. All else equal, BLK’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. EBITDA margin of 40.86% for BlackRock, Inc. (BLK). RIO’s ROI is 23.70% while BLK has a ROI of 11.70%. The interpretation is that RIO’s business generates a higher return on investment than BLK’s.

Cash Flow

Earnings don’t always accurately reflect the amount of cash that a company brings in. On a percent-of-sales basis, RIO’s free cash flow was 0% while BLK converted 3.32% of its revenues into cash flow. This means that, for a given level of sales, BLK is able to generate more free cash flow for investors.

Liquidity and Financial Risk

RIO’s debt-to-equity ratio is 0.36 versus a D/E of 0.16 for BLK. RIO is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

RIO trades at a forward P/E of 8.40, a P/B of 2.07, and a P/S of 2.12, compared to a forward P/E of 13.89, a P/B of 2.15, and a P/S of 4.86 for BLK. RIO is the cheaper 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. RIO is currently priced at a -16.33% to its one-year price target of 59.77. Comparatively, BLK is -19.41% relative to its price target of 527.77. This suggests that BLK is the better investment over the next year.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. RIO has a beta of 0.92 and BLK’s beta is 1.53. RIO’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. RIO has a short ratio of 3.16 compared to a short interest of 3.19 for BLK. This implies that the market is currently less bearish on the outlook for RIO.

Summary

BlackRock, Inc. (NYSE:BLK) beats Rio Tinto Group (NYSE:RIO) on a total of 7 of the 14 factors compared between the two stocks. BLK generates a higher return on investment, is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, RIO is the cheaper of the two stocks on an earnings, book value and sales basis, BLK is more undervalued relative to its price target.