Thermo Fisher Scientific Inc. (NYSE:TMO) shares are up more than 29.36% this year and recently decreased -0.86% or -$2.52 to settle at $289.50. Castlight Health, Inc. (NYSE:CSLT), on the other hand, is down -29.49% year to date as of 09/10/2019. It currently trades at $1.53 and has returned 9.29% during the past week.
Thermo Fisher Scientific Inc. (NYSE:TMO) and Castlight Health, Inc. (NYSE:CSLT) are the two most active stocks in the Medical Laboratories & Research industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect TMO to grow earnings at a 11.17% annual rate over the next 5 years. Comparatively, CSLT is expected to grow at a 30.00% annual rate. All else equal, CSLT’s higher growth rate would imply a greater potential for capital appreciation.
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Thermo Fisher Scientific Inc. (TMO) has an EBITDA margin of 25.25%. This suggests that TMO underlying business is more profitable TMO’s ROI is 7.70% while CSLT has a ROI of -20.10%. The interpretation is that TMO’s business generates a higher return on investment than CSLT’s.Cash Flow
If there’s one thing investors care more about than earnings, it’s cash flow. TMO’s free cash flow (“FCF”) per share for the trailing twelve months was +2.48. Comparatively, CSLT’s free cash flow per share was -0.02. On a percent-of-sales basis, TMO’s free cash flow was 4.08% while CSLT converted -0% of its revenues into cash flow. This means that, for a given level of sales, TMO 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. TMO has a current ratio of 1.50 compared to 1.90 for CSLT. This means that CSLT can more easily cover its most immediate liabilities over the next twelve months. TMO’s debt-to-equity ratio is 0.66 versus a D/E of 0.01 for CSLT. TMO is therefore the more solvent of the two companies, and has lower financial risk.Valuation
TMO trades at a forward P/E of 21.32, a P/B of 4.03, and a P/S of 4.66, compared to a P/B of 1.19, and a P/S of 1.48 for CSLT. TMO 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 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. TMO is currently priced at a -5.97% to its one-year price target of 307.88. Comparatively, CSLT is -54.05% relative to its price target of 3.33. This suggests that CSLT 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. TMO has a beta of 1.13 and CSLT’s beta is 1.55. TMO’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. TMO has a short ratio of 1.93 compared to a short interest of 4.03 for CSLT. This implies that the market is currently less bearish on the outlook for TMO.
Castlight Health, Inc. (NYSE:CSLT) beats Thermo Fisher Scientific Inc. (NYSE:TMO) on a total of 7 of the 14 factors compared between the two stocks. CSLT is more profitable, higher liquidity and has lower financial risk. In terms of valuation, CSLT is the cheaper of the two stocks on an earnings, book value and sales basis, CSLT is more undervalued relative to its price target.