Comparing Allison Transmission Holdings, Inc. (ALSN) and Abiomed, Inc. (ABMD)

Allison Transmission Holdings, Inc. (NYSE:ALSN) shares are up more than 7.81% this year and recently increased 1.31% or $0.61 to settle at $47.34. Abiomed, Inc. (NASDAQ:ABMD), on the other hand, is down -40.99% year to date as of 09/10/2019. It currently trades at $191.82 and has returned 4.45% during the past week.

Allison Transmission Holdings, Inc. (NYSE:ALSN) and Abiomed, Inc. (NASDAQ:ABMD) are the two most active stocks in the Auto Parts industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect ALSN to grow earnings at a 6.43% annual rate over the next 5 years. Comparatively, ABMD is expected to grow at a 24.20% annual rate. All else equal, ABMD’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 41.84% for Abiomed, Inc. (ABMD). ALSN’s ROI is 19.00% while ABMD has a ROI of 23.50%. The interpretation is that ABMD’s business generates a higher return on investment than ALSN’s.

Cash Flow

Earnings don’t always accurately reflect the amount of cash that a company brings in. ALSN’s free cash flow (“FCF”) per share for the trailing twelve months was +1.58. Comparatively, ABMD’s free cash flow per share was +1.08. On a percent-of-sales basis, ALSN’s free cash flow was 7.02% while ABMD converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, ALSN is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. ALSN has a current ratio of 1.50 compared to 6.80 for ABMD. This means that ABMD can more easily cover its most immediate liabilities over the next twelve months. ALSN’s debt-to-equity ratio is 3.77 versus a D/E of 0.00 for ABMD. ALSN is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

ALSN trades at a forward P/E of 10.29, a P/B of 8.72, and a P/S of 2.08, compared to a forward P/E of 36.41, a P/B of 8.65, and a P/S of 10.97 for ABMD. 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

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. ALSN is currently priced at a -5.83% to its one-year price target of 50.27. Comparatively, ABMD is -25.2% relative to its price target of 256.43. This suggests that ABMD is the better investment over the next year.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. ALSN has a beta of 1.38 and ABMD’s beta is 0.42. ABMD’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. ALSN has a short ratio of 3.39 compared to a short interest of 2.57 for ABMD. This implies that the market is currently less bearish on the outlook for ABMD.

Summary

Abiomed, Inc. (NASDAQ:ABMD) beats Allison Transmission Holdings, Inc. (NYSE:ALSN) on a total of 9 of the 14 factors compared between the two stocks. ABMD is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. ABMD is more undervalued relative to its price target. Finally, ABMD has better sentiment signals based on short interest.