Ingersoll-Rand Plc (NYSE:IR) shares are up more than 32.70% this year and recently increased 1.09% or $1.31 to settle at $121.06. Ralph Lauren Corporation (NYSE:RL), on the other hand, is down -4.51% year to date as of 10/25/2019. It currently trades at $98.79 and has returned 4.02% during the past week.
Ingersoll-Rand Plc (NYSE:IR) and Ralph Lauren Corporation (NYSE:RL) are the two most active stocks in the Diversified Machinery 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect IR to grow earnings at a 10.52% annual rate over the next 5 years. Comparatively, RL is expected to grow at a 7.19% annual rate. All else equal, IR’s higher growth rate would imply a greater potential for capital appreciation.
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 13.39% for Ralph Lauren Corporation (RL). IR’s ROI is 14.60% while RL has a ROI of 10.40%. The interpretation is that IR’s business generates a higher return on investment than RL’s.Cash Flow
The value of a stock is simply the present value of its future free cash flows. IR’s free cash flow (“FCF”) per share for the trailing twelve months was +1.06. Comparatively, RL’s free cash flow per share was +1.24. On a percent-of-sales basis, IR’s free cash flow was 1.63% while RL converted 1.52% of its revenues into cash flow. This means that, for a given level of sales, IR is able to generate more free cash flow for investors.
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. IR has a current ratio of 1.20 compared to 2.30 for RL. This means that RL can more easily cover its most immediate liabilities over the next twelve months. IR’s debt-to-equity ratio is 0.81 versus a D/E of 0.30 for RL. IR is therefore the more solvent of the two companies, and has lower financial risk.Valuation
IR trades at a forward P/E of 17.33, a P/B of 4.11, and a P/S of 1.82, compared to a forward P/E of 11.63, a P/B of 2.56, and a P/S of 1.20 for RL. IR 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. IR is currently priced at a -8.41% to its one-year price target of 132.18. Comparatively, RL is -20.41% relative to its price target of 124.13. This suggests that RL 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. IR has a beta of 1.22 and RL’s beta is 0.91. RL’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. IR has a short ratio of 1.94 compared to a short interest of 3.57 for RL. This implies that the market is currently less bearish on the outlook for IR.
Ralph Lauren Corporation (NYSE:RL) beats Ingersoll-Rand Plc (NYSE:IR) on a total of 8 of the 14 factors compared between the two stocks. RL is growing fastly, higher liquidity and has lower financial risk. In terms of valuation, RL is the cheaper of the two stocks on an earnings, book value and sales basis, RL is more undervalued relative to its price target.