Baker Hughes, a GE company (BHGE) vs. CIT Group Inc. (CIT): Which is the Better Investment?

Baker Hughes, a GE company (NYSE:BHGE) shares are up more than 12.14% this year and recently decreased -0.29% or -$0.07 to settle at $24.11. CIT Group Inc. (NYSE:CIT), on the other hand, is up 21.30% year to date as of 09/10/2019. It currently trades at $46.42 and has returned 11.88% during the past week.

Baker Hughes, a GE company (NYSE:BHGE) and CIT Group Inc. (NYSE:CIT) are the two most active stocks in the Oil & Gas Equipment & Services industry based on today’s 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

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect BHGE to grow earnings at a 35.32% annual rate over the next 5 years. Comparatively, CIT is expected to grow at a 10.00% annual rate. All else equal, BHGE’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 82.68% for CIT Group Inc. (CIT). BHGE’s ROI is 0.80% while CIT has a ROI of 7.20%. The interpretation is that CIT’s business generates a higher return on investment than BHGE’s.

Cash Flow

Earnings don’t always accurately reflect the amount of cash that a company brings in. BHGE’s free cash flow (“FCF”) per share for the trailing twelve months was +0.39. Comparatively, CIT’s free cash flow per share was -1.31. On a percent-of-sales basis, BHGE’s free cash flow was 1.77% while CIT converted -3.79% of its revenues into cash flow. This means that, for a given level of sales, BHGE is able to generate more free cash flow for investors.

Liquidity and Financial Risk

BHGE’s debt-to-equity ratio is 0.21 versus a D/E of 0.79 for CIT. CIT is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

BHGE trades at a forward P/E of 16.12, a P/B of 0.36, and a P/S of 1.06, compared to a forward P/E of 8.48, a P/B of 0.80, and a P/S of 2.21 for CIT. 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

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. BHGE is currently priced at a -18.99% to its one-year price target of 29.76. Comparatively, CIT is -16.84% relative to its price target of 55.82. This suggests that BHGE 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. BHGE has a beta of 0.97 and CIT’s beta is 1.60. BHGE’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. BHGE has a short ratio of 3.93 compared to a short interest of 5.28 for CIT. This implies that the market is currently less bearish on the outlook for BHGE.

Summary

Baker Hughes, a GE company (NYSE:BHGE) beats CIT Group Inc. (NYSE:CIT) on a total of 11 of the 14 factors compared between the two stocks. BHGE is growing fastly, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, BHGE is the cheaper of the two stocks on book value and sales basis, BHGE is more undervalued relative to its price target. Finally, BHGE has better sentiment signals based on short interest.