International Paper Company (IP) vs. Telefonica, S.A. (TEF): Breaking Down the Packaging & Containers Industry’s Two Hottest Stocks

International Paper Company (NYSE:IP) shares are up more than 2.16% this year and recently increased 2.66% or $1.07 to settle at $41.23. Telefonica, S.A. (NYSE:TEF), on the other hand, is down -13.36% year to date as of 09/10/2019. It currently trades at $7.33 and has returned 5.62% during the past week.

International Paper Company (NYSE:IP) and Telefonica, S.A. (NYSE:TEF) are the two most active stocks in the Packaging & Containers 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 IP to grow earnings at a -1.77% annual rate over the next 5 years.

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 11.44% for Telefonica, S.A. (TEF). IP’s ROI is 12.90% while TEF has a ROI of 7.00%. The interpretation is that IP’s business generates a higher return on investment than TEF’s.

Cash Flow

The amount of free cash flow available to investors is ultimately what determines the value of a stock. IP’s free cash flow (“FCF”) per share for the trailing twelve months was +1.34. Comparatively, TEF’s free cash flow per share was +0.13. On a percent-of-sales basis, IP’s free cash flow was 2.26% while TEF converted 1.17% of its revenues into cash flow. This means that, for a given level of sales, IP is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. IP has a current ratio of 1.50 compared to 0.80 for TEF. This means that IP can more easily cover its most immediate liabilities over the next twelve months. IP’s debt-to-equity ratio is 1.43 versus a D/E of 3.18 for TEF. TEF is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

IP trades at a forward P/E of 10.08, a P/B of 2.19, and a P/S of 0.70, compared to a forward P/E of 7.56, a P/B of 2.25, and a P/S of 0.71 for TEF. 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. IP is currently priced at a -14.25% to its one-year price target of 48.08. Comparatively, TEF is -6.51% relative to its price target of 7.84. This suggests that IP 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. IP has a beta of 1.53 and TEF’s beta is 0.71. TEF’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. IP has a short ratio of 3.60 compared to a short interest of 1.24 for TEF. This implies that the market is currently less bearish on the outlook for TEF.

Summary

International Paper Company (NYSE:IP) beats Telefonica, S.A. (NYSE:TEF) on a total of 9 of the 14 factors compared between the two stocks. IP generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, IP is the cheaper of the two stocks on book value and sales basis, IP is more undervalued relative to its price target.