Dissecting the Numbers for Air Products and Chemicals, Inc. (APD) and Minerals Technologies Inc. (MTX)

Air Products and Chemicals, Inc. (NYSE:APD) shares are up more than 33.57% this year and recently decreased -1.19% or -$2.58 to settle at $213.78. Minerals Technologies Inc. (NYSE:MTX), on the other hand, is up 1.11% year to date as of 09/10/2019. It currently trades at $51.91 and has returned 9.93% during the past week.

Air Products and Chemicals, Inc. (NYSE:APD) and Minerals Technologies Inc. (NYSE:MTX) are the two most active stocks in the Chemicals – Major Diversified 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

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect APD to grow earnings at a 12.19% annual rate over the next 5 years. Comparatively, MTX is expected to grow at a 3.50% annual rate. All else equal, APD’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. 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 18.01% for Minerals Technologies Inc. (MTX). APD’s ROI is 11.10% while MTX has a ROI of 9.20%. The interpretation is that APD’s business generates a higher return on investment than MTX’s.

Cash Flow

Cash is king when it comes to investing. APD’s free cash flow (“FCF”) per share for the trailing twelve months was -0.37. Comparatively, MTX’s free cash flow per share was +1.35. On a percent-of-sales basis, APD’s free cash flow was -0.91% while MTX converted 2.62% of its revenues into cash flow. This means that, for a given level of sales, MTX 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. APD has a current ratio of 2.30 compared to 2.30 for MTX. This means that APD can more easily cover its most immediate liabilities over the next twelve months. APD’s debt-to-equity ratio is 0.34 versus a D/E of 0.70 for MTX. MTX is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

APD trades at a forward P/E of 22.72, a P/B of 4.14, and a P/S of 5.28, compared to a forward P/E of 11.35, a P/B of 1.31, and a P/S of 1.00 for MTX. APD is the expensive 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

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”. APD is currently priced at a -10.98% to its one-year price target of 240.15. Comparatively, MTX is -15.59% relative to its price target of 61.50. This suggests that MTX is the better investment over the next year.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. APD has a beta of 0.86 and MTX’s beta is 1.87. APD’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. APD has a short ratio of 2.80 compared to a short interest of 2.23 for MTX. This implies that the market is currently less bearish on the outlook for MTX.

Summary

Minerals Technologies Inc. (NYSE:MTX) beats Air Products and Chemicals, Inc. (NYSE:APD) on a total of 7 of the 14 factors compared between the two stocks. MTX is growing fastly and has a higher cash conversion rate. In terms of valuation, MTX is the cheaper of the two stocks on an earnings, book value and sales basis, MTX is more undervalued relative to its price target. Finally, MTX has better sentiment signals based on short interest.