Comparing Arconic Inc. (ARNC) and Central Garden & Pet Company (CENT)

Arconic Inc. (NYSE:ARNC) shares are up more than 58.42% this year and recently increased 1.56% or $0.41 to settle at $26.71. Central Garden & Pet Company (NASDAQ:CENT), on the other hand, is down -18.87% year to date as of 09/10/2019. It currently trades at $27.95 and has returned 6.72% during the past week.

Arconic Inc. (NYSE:ARNC) and Central Garden & Pet Company (NASDAQ:CENT) are the two most active stocks in the Aluminum 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 ARNC to grow earnings at a 23.80% annual rate over the next 5 years. Comparatively, CENT is expected to grow at a 7.50% annual rate. All else equal, ARNC’s higher growth rate would imply a greater potential for capital appreciation.

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., compared to an EBITDA margin of 9.2% for Central Garden & Pet Company (CENT). ARNC’s ROI is 9.80% while CENT has a ROI of 8.70%. The interpretation is that ARNC’s business generates a higher return on investment than CENT’s.

Cash Flow

Earnings don’t always accurately reflect the amount of cash that a company brings in. ARNC’s free cash flow (“FCF”) per share for the trailing twelve months was -0.09. Comparatively, CENT’s free cash flow per share was +2.85. On a percent-of-sales basis, ARNC’s free cash flow was -0.28% while CENT converted 7.43% of its revenues into cash flow. This means that, for a given level of sales, CENT is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. ARNC has a current ratio of 1.70 compared to 4.80 for CENT. This means that CENT can more easily cover its most immediate liabilities over the next twelve months. ARNC’s debt-to-equity ratio is 1.32 versus a D/E of 0.67 for CENT. ARNC is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

ARNC trades at a forward P/E of 11.87, a P/B of 2.48, and a P/S of 0.83, compared to a forward P/E of 14.33, a P/B of 1.55, and a P/S of 0.66 for CENT. ARNC 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

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”. ARNC is currently priced at a -4.2% to its one-year price target of 27.88. Comparatively, CENT is -18.99% relative to its price target of 34.50. This suggests that CENT 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. ARNC has a beta of 1.48 and CENT’s beta is -0.10. CENT’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. ARNC has a short ratio of 4.54 compared to a short interest of 8.37 for CENT. This implies that the market is currently less bearish on the outlook for ARNC.

Summary

Central Garden & Pet Company (NASDAQ:CENT) beats Arconic Inc. (NYSE:ARNC) on a total of 9 of the 14 factors compared between the two stocks. CENT is growing fastly, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, CENT is the cheaper of the two stocks on book value and sales basis, CENT is more undervalued relative to its price target.