Choosing Between Rio Tinto Group (RIO) and ZTO Express (Cayman) Inc. (ZTO)

Rio Tinto Group (NYSE:RIO) shares are up more than 20.83% this year and recently decreased -0.27% or -$0.15 to settle at $55.51. ZTO Express (Cayman) Inc. (NYSE:ZTO), on the other hand, is up 44.12% year to date as of 11/07/2019. It currently trades at $22.51 and has returned 2.32% during the past week.

Rio Tinto Group (NYSE:RIO) and ZTO Express (Cayman) Inc. (NYSE:ZTO) are the two most active stocks in the Industrial Metals & Minerals industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

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 RIO to grow earnings at a -7.10% annual rate over the next 5 years. Comparatively, ZTO is expected to grow at a 2.87% annual rate. All else equal, ZTO’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 Return on Investment (ROI) as measures of profitability and return. RIO’s ROI is 23.70% while ZTO has a ROI of 9.90%. The interpretation is that RIO’s business generates a higher return on investment than ZTO’s.

Cash Flow

The amount of free cash flow available to investors is ultimately what determines the value of a stock. On a percent-of-sales basis, RIO’s free cash flow was 0% while ZTO converted 0% of its revenues into cash flow. This means that, for a given level of sales, RIO is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. RIO has a current ratio of 1.50 compared to 3.80 for ZTO. This means that ZTO can more easily cover its most immediate liabilities over the next twelve months. RIO’s debt-to-equity ratio is 0.36 versus a D/E of 0.00 for ZTO. RIO is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

RIO trades at a forward P/E of 9.70, a P/B of 2.29, and a P/S of 2.19, compared to a forward P/E of 20.98, a P/B of 3.61, and a P/S of 6.31 for ZTO. RIO is the cheaper 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

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. RIO is currently priced at a 0.85% to its one-year price target of 55.04. Comparatively, ZTO is -3.18% relative to its price target of 23.25. This suggests that ZTO is the better investment over the next year.

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. RIO has a short ratio of 3.67 compared to a short interest of 4.20 for ZTO. This implies that the market is currently less bearish on the outlook for RIO.

Summary

ZTO Express (Cayman) Inc. (NYSE:ZTO) beats Rio Tinto Group (NYSE:RIO) on a total of 6 of the 14 factors compared between the two stocks. ZTO generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, RIO is the cheaper of the two stocks on an earnings, book value and sales basis, ZTO is more undervalued relative to its price target.