A. O. Smith Corporation (NYSE:AOS) shares are up more than 16.44% this year and recently increased 1.26% or $0.62 to settle at $49.72. Big 5 Sporting Goods Corporation (NASDAQ:BGFV), on the other hand, is down -11.20% year to date as of 09/10/2019. It currently trades at $2.30 and has returned 35.29% during the past week.
A. O. Smith Corporation (NYSE:AOS) and Big 5 Sporting Goods Corporation (NASDAQ:BGFV) are the two most active stocks in the Industrial Electrical Equipment industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect AOS to grow earnings at a 6.40% annual rate over the next 5 years. Comparatively, BGFV is expected to grow at a -6.54% annual rate. All else equal, AOS’s higher growth rate would imply a greater potential for capital appreciation.
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 2.29% for Big 5 Sporting Goods Corporation (BGFV). AOS’s ROI is 22.90% while BGFV has a ROI of -0.10%. The interpretation is that AOS’s business generates a higher return on investment than BGFV’s.Cash Flow
The value of a stock is simply the present value of its future free cash flows. AOS’s free cash flow (“FCF”) per share for the trailing twelve months was +0.41. Comparatively, BGFV’s free cash flow per share was +1.13. On a percent-of-sales basis, AOS’s free cash flow was 2.11% while BGFV converted 0% of its revenues into cash flow. This means that, for a given level of sales, AOS is able to generate more free cash flow for investors.
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. AOS has a current ratio of 2.20 compared to 1.50 for BGFV. This means that AOS can more easily cover its most immediate liabilities over the next twelve months. AOS’s debt-to-equity ratio is 0.21 versus a D/E of 0.39 for BGFV. BGFV is therefore the more solvent of the two companies, and has lower financial risk.Valuation
AOS trades at a forward P/E of 18.48, a P/B of 4.81, and a P/S of 2.64, compared to a forward P/E of 13.53, a P/B of 0.28, and a P/S of 0.05 for BGFV. AOS 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
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. AOS is currently priced at a -5.89% to its one-year price target of 52.83. Comparatively, BGFV is -54% relative to its price target of 5.00. This suggests that BGFV 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. AOS has a beta of 1.51 and BGFV’s beta is 0.52. BGFV’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. AOS has a short ratio of 4.78 compared to a short interest of 16.48 for BGFV. This implies that the market is currently less bearish on the outlook for AOS.
A. O. Smith Corporation (NYSE:AOS) beats Big 5 Sporting Goods Corporation (NASDAQ:BGFV) on a total of 8 of the 14 factors compared between the two stocks. AOS is growing fastly, is more profitable, generates a higher return on investment, has a higher cash conversion rate, higher liquidity and has lower financial risk. Finally, AOS has better sentiment signals based on short interest.