Critical Comparison: Campbell Soup Company (CPB) vs. WABCO Holdings Inc. (WBC)

Campbell Soup Company (NYSE:CPB) shares are up more than 41.16% this year and recently decreased -1.04% or -$0.49 to settle at $46.57. WABCO Holdings Inc. (NYSE:WBC), on the other hand, is up 25.54% year to date as of 11/29/2019. It currently trades at $134.75 and has returned 0.15% during the past week.

Campbell Soup Company (NYSE:CPB) and WABCO Holdings Inc. (NYSE:WBC) are the two most active stocks in the Processed & Packaged Goods industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect CPB to grow earnings at a -4.00% annual rate over the next 5 years. Comparatively, WBC is expected to grow at a 6.51% annual rate. All else equal, WBC’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 14.56% for WABCO Holdings Inc. (WBC). CPB’s ROI is 8.70% while WBC has a ROI of 22.80%. The interpretation is that WBC’s business generates a higher return on investment than CPB’s.

Cash Flow

Cash is king when it comes to investing. CPB’s free cash flow (“FCF”) per share for the trailing twelve months was +0.12. Comparatively, WBC’s free cash flow per share was +2.45. On a percent-of-sales basis, CPB’s free cash flow was 0.45% while WBC converted 3.28% of its revenues into cash flow. This means that, for a given level of sales, WBC is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. CPB has a current ratio of 0.60 compared to 3.00 for WBC. This means that WBC can more easily cover its most immediate liabilities over the next twelve months. CPB’s debt-to-equity ratio is 7.68 versus a D/E of 0.62 for WBC. CPB is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

CPB trades at a forward P/E of 17.57, a P/B of 12.72, and a P/S of 1.75, compared to a forward P/E of 20.64, a P/B of 5.08, and a P/S of 1.94 for WBC. 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

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. CPB is currently priced at a 8.88% to its one-year price target of 42.77. Comparatively, WBC is -1.77% relative to its price target of 137.18. This suggests that WBC 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. CPB has a beta of 0.41 and WBC’s beta is 1.30. CPB’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. CPB has a short ratio of 9.24 compared to a short interest of 6.79 for WBC. This implies that the market is currently less bearish on the outlook for WBC.

Summary

WABCO Holdings Inc. (NYSE:WBC) beats Campbell Soup Company (NYSE:CPB) on a total of 10 of the 14 factors compared between the two stocks. WBC 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. WBC is more undervalued relative to its price target. Finally, WBC has better sentiment signals based on short interest.