A Side-by-side Analysis of Abbott Laboratories (ABT) and Teradyne, Inc. (TER)

Abbott Laboratories (NYSE:ABT) shares are up more than 16.84% this year and recently decreased -1.10% or -$0.94 to settle at $84.51. Teradyne, Inc. (NASDAQ:TER), on the other hand, is up 99.30% year to date as of 12/02/2019. It currently trades at $62.54 and has returned 0.94% during the past week.

Abbott Laboratories (NYSE:ABT) and Teradyne, Inc. (NASDAQ:TER) are the two most active stocks in the Medical Appliances & Equipment 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 ABT to grow earnings at a 11.23% annual rate over the next 5 years. Comparatively, TER is expected to grow at a 13.39% annual rate. All else equal, TER’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

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 29.5% for Teradyne, Inc. (TER). ABT’s ROI is 6.10% while TER has a ROI of 21.50%. The interpretation is that TER’s business generates a higher return on investment than ABT’s.

Cash Flow

The amount of free cash flow available to investors is ultimately what determines the value of a stock. ABT’s free cash flow (“FCF”) per share for the trailing twelve months was +0.55. Comparatively, TER’s free cash flow per share was +0.81. On a percent-of-sales basis, ABT’s free cash flow was 3.18% while TER converted 6.46% of its revenues into cash flow. This means that, for a given level of sales, TER is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios are important because they reveal the financial health of a company. ABT has a current ratio of 1.50 compared to 3.40 for TER. This means that TER can more easily cover its most immediate liabilities over the next twelve months. ABT’s debt-to-equity ratio is 0.60 versus a D/E of 0.26 for TER. ABT is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

ABT trades at a forward P/E of 23.47, a P/B of 4.71, and a P/S of 4.76, compared to a forward P/E of 19.72, a P/B of 7.16, and a P/S of 4.96 for TER. 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”. ABT is currently priced at a -10.12% to its one-year price target of 94.03. Comparatively, TER is 2.63% relative to its price target of 60.94. This suggests that ABT 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. ABT has a beta of 1.11 and TER’s beta is 1.56. ABT’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. ABT has a short ratio of 3.80 compared to a short interest of 4.67 for TER. This implies that the market is currently less bearish on the outlook for ABT.

Summary

Teradyne, Inc. (NASDAQ:TER) beats Abbott Laboratories (NYSE:ABT) on a total of 8 of the 14 factors compared between the two stocks. TER , 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.