Cardinal Health, Inc. (CAH) and Pioneer Natural Resources Company (PXD) Go Head-to-head

Cardinal Health, Inc. (NYSE:CAH) shares are up more than 22.51% this year and recently decreased -0.71% or -$0.39 to settle at $54.64. Pioneer Natural Resources Company (NYSE:PXD), on the other hand, is down -3.60% year to date as of 12/02/2019. It currently trades at $126.78 and has returned -2.15% during the past week.

Cardinal Health, Inc. (NYSE:CAH) and Pioneer Natural Resources Company (NYSE:PXD) are the two most active stocks in the Drugs Wholesale 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

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect CAH to grow earnings at a 3.22% annual rate over the next 5 years. Comparatively, PXD is expected to grow at a 26.70% annual rate. All else equal, PXD’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 EBITDA margin and Return on Investment (ROI) as measures of profitability and return. EBITDA margin of 31.76% for Pioneer Natural Resources Company (PXD). CAH’s ROI is 11.70% while PXD has a ROI of 7.40%. The interpretation is that CAH’s business generates a higher return on investment than PXD’s.

Cash Flow

Cash is king when it comes to investing. CAH’s free cash flow (“FCF”) per share for the trailing twelve months was -2.94. Comparatively, PXD’s free cash flow per share was -0.15. On a percent-of-sales basis, CAH’s free cash flow was -0.59% while PXD converted -0.26% of its revenues into cash flow. This means that, for a given level of sales, PXD is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. CAH has a current ratio of 1.10 compared to 0.80 for PXD. This means that CAH can more easily cover its most immediate liabilities over the next twelve months. CAH’s debt-to-equity ratio is 8.88 versus a D/E of 0.19 for PXD. CAH is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

CAH trades at a forward P/E of 10.36, a P/B of 17.97, and a P/S of 0.11, compared to a forward P/E of 14.39, a P/B of 1.79, and a P/S of 2.32 for PXD. 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

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. CAH is currently priced at a 5.58% to its one-year price target of 51.75. Comparatively, PXD is -28.21% relative to its price target of 176.59. This suggests that PXD is the better investment over the next year.

Risk and Volatility

No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. CAH has a beta of 1.36 and PXD’s beta is 1.23. PXD’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. CAH has a short ratio of 5.86 compared to a short interest of 2.89 for PXD. This implies that the market is currently less bearish on the outlook for PXD.

Summary

Pioneer Natural Resources Company (NYSE:PXD) beats Cardinal Health, Inc. (NYSE:CAH) on a total of 10 of the 14 factors compared between the two stocks. PXD generates a higher return on investment, is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. PXD is more undervalued relative to its price target. Finally, PXD has better sentiment signals based on short interest.