McKesson Corporation (NYSE:MCK) shares are up more than 32.44% this year and recently increased 2.52% or $3.6 to settle at $146.31. Celanese Corporation (NYSE:CE), on the other hand, is up 23.37% year to date as of 08/13/2019. It currently trades at $111.00 and has returned 6.09% during the past week.
McKesson Corporation (NYSE:MCK) and Celanese Corporation (NYSE:CE) are the two most active stocks in the Drugs Wholesale 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect MCK to grow earnings at a 7.03% annual rate over the next 5 years. Comparatively, CE is expected to grow at a 5.40% annual rate. All else equal, MCK’s higher growth rate would imply a greater potential for capital appreciation.
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. , compared to an EBITDA margin of 25.69% for Celanese Corporation (CE). MCK’s ROI is 2.10% while CE has a ROI of 15.90%. The interpretation is that CE’s business generates a higher return on investment than MCK’s.Cash Flow
Earnings don’t always accurately reflect the amount of cash that a company brings in. MCK’s free cash flow (“FCF”) per share for the trailing twelve months was -1.13. Comparatively, CE’s free cash flow per share was +2.23. On a percent-of-sales basis, MCK’s free cash flow was -0.1% while CE converted 3.86% of its revenues into cash flow. This means that, for a given level of sales, CE is able to generate more free cash flow for investors.
Balance sheet risk is one of the biggest factors to consider before investing. MCK has a current ratio of 1.00 compared to 2.00 for CE. This means that CE can more easily cover its most immediate liabilities over the next twelve months. MCK’s debt-to-equity ratio is 0.98 versus a D/E of 1.31 for CE. CE is therefore the more solvent of the two companies, and has lower financial risk.Valuation
MCK trades at a forward P/E of 9.41, a P/B of 3.49, and a P/S of 0.12, compared to a forward P/E of 9.76, a P/B of 4.86, and a P/S of 2.04 for CE. MCK 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. MCK is currently priced at a -5.28% to its one-year price target of 154.47. Comparatively, CE is -6.68% relative to its price target of 118.95. This suggests that CE 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. MCK has a beta of 1.12 and CE’s beta is 1.37. MCK’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. MCK has a short ratio of 3.33 compared to a short interest of 3.38 for CE. This implies that the market is currently less bearish on the outlook for MCK.
Celanese Corporation (NYSE:CE) beats McKesson Corporation (NYSE:MCK) on a total of 7 of the 14 factors compared between the two stocks. CE is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, MCK is the cheaper of the two stocks on an earnings, book value and sales basis, CE is more undervalued relative to its price target.