CME Group Inc. (NASDAQ:CME) shares are up more than 7.77% this year and recently increased 0.87% or $1.75 to settle at $202.73. Allison Transmission Holdings, Inc. (NYSE:ALSN), on the other hand, is up 10.23% year to date as of 11/29/2019. It currently trades at $48.40 and has returned 5.31% during the past week.
CME Group Inc. (NASDAQ:CME) and Allison Transmission Holdings, Inc. (NYSE:ALSN) are the two most active stocks in the Investment Brokerage – National 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.
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 CME to grow earnings at a 6.42% annual rate over the next 5 years. Comparatively, ALSN is expected to grow at a 4.95% annual rate. All else equal, CME’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 42.78% for Allison Transmission Holdings, Inc. (ALSN). CME’s ROI is 5.90% while ALSN has a ROI of 19.00%. The interpretation is that ALSN’s business generates a higher return on investment than CME’s.Cash Flow
The amount of free cash flow available to investors is ultimately what determines the value of a stock. CME’s free cash flow (“FCF”) per share for the trailing twelve months was +1.35. Comparatively, ALSN’s free cash flow per share was +1.21. On a percent-of-sales basis, CME’s free cash flow was 11.23% while ALSN converted 5.32% of its revenues into cash flow. This means that, for a given level of sales, CME 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. CME has a current ratio of 1.00 compared to 1.60 for ALSN. This means that ALSN can more easily cover its most immediate liabilities over the next twelve months. CME’s debt-to-equity ratio is 0.15 versus a D/E of 3.39 for ALSN. ALSN is therefore the more solvent of the two companies, and has lower financial risk.Valuation
CME trades at a forward P/E of 27.31, a P/B of 2.70, and a P/S of 14.50, compared to a forward P/E of 11.23, a P/B of 7.82, and a P/S of 2.13 for ALSN. CME is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S 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
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. CME is currently priced at a -6.09% to its one-year price target of 215.88. Comparatively, ALSN is -1.73% relative to its price target of 49.25. This suggests that CME is the better investment over the next year.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. CME has a beta of 0.16 and ALSN’s beta is 1.38. CME’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. CME has a short ratio of 3.99 compared to a short interest of 2.63 for ALSN. This implies that the market is currently less bearish on the outlook for ALSN.
CME Group Inc. (NASDAQ:CME) beats Allison Transmission Holdings, Inc. (NYSE:ALSN) on a total of 8 of the 14 factors compared between the two stocks. CME is growing fastly, is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. CME is more undervalued relative to its price target.