Choosing Between Olin Corporation (OLN) and AerCap Holdings N.V. (AER)

Olin Corporation (NYSE:OLN) shares are down more than -6.91% this year and recently decreased -3.90% or -$0.76 to settle at $18.72. AerCap Holdings N.V. (NYSE:AER), on the other hand, is up 42.40% year to date as of 09/12/2019. It currently trades at $56.39 and has returned 3.24% during the past week.

Olin Corporation (NYSE:OLN) and AerCap Holdings N.V. (NYSE:AER) are the two most active stocks in the Specialty Chemicals 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 consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect OLN to grow earnings at a 11.35% annual rate over the next 5 years. Comparatively, AER is expected to grow at a 6.30% annual rate. All else equal, OLN’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

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. Olin Corporation (OLN) has an EBITDA margin of 18.12%. This suggests that OLN underlying business is more profitable OLN’s ROI is 9.40% while AER has a ROI of 5.20%. The interpretation is that OLN’s business generates a higher return on investment than AER’s.

Cash Flow

If there’s one thing investors care more about than earnings, it’s cash flow. OLN’s free cash flow (“FCF”) per share for the trailing twelve months was +0.06. Comparatively, AER’s free cash flow per share was -1.38. On a percent-of-sales basis, OLN’s free cash flow was 0.14% while AER converted -3.93% of its revenues into cash flow. This means that, for a given level of sales, OLN is able to generate more free cash flow for investors.

Liquidity and Financial Risk

OLN’s debt-to-equity ratio is 1.17 versus a D/E of 3.22 for AER. AER is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

OLN trades at a forward P/E of 10.45, a P/B of 1.11, and a P/S of 0.46, compared to a forward P/E of 7.47, a P/B of 0.85, and a P/S of 1.64 for AER. OLN is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B 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

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. OLN is currently priced at a -21.21% to its one-year price target of 23.76. Comparatively, AER is -13.64% relative to its price target of 65.30. This suggests that OLN is the better investment over the next year.

Risk and Volatility

No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. OLN has a beta of 1.56 and AER’s beta is 1.80. OLN’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. OLN has a short ratio of 6.02 compared to a short interest of 2.85 for AER. This implies that the market is currently less bearish on the outlook for AER.

Summary

Olin Corporation (NYSE:OLN) beats AerCap Holdings N.V. (NYSE:AER) on a total of 10 of the 14 factors compared between the two stocks. OLN is growing fastly, is more profitable, 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. OLN is more undervalued relative to its price target.