Comparing Quanta Services, Inc. (PWR) and 360 Finance, Inc. (QFIN)

Quanta Services, Inc. (NYSE:PWR) shares are up more than 37.41% this year and recently decreased -0.67% or -$0.28 to settle at $41.36. 360 Finance, Inc. (NASDAQ:QFIN), on the other hand, is down -38.86% year to date as of 12/02/2019. It currently trades at $9.48 and has returned 18.95% during the past week.

Quanta Services, Inc. (NYSE:PWR) and 360 Finance, Inc. (NASDAQ:QFIN) are the two most active stocks in the General Contractors 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

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 PWR to grow earnings at a 13.90% annual rate over the next 5 years.

Profitability and Returns

A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. Quanta Services, Inc. (PWR) has an EBITDA margin of 7.2%. This suggests that PWR underlying business is more profitable PWR’s ROI is 7.90% while QFIN has a ROI of 26.50%. The interpretation is that QFIN’s business generates a higher return on investment than PWR’s.

Cash Flow

Earnings don’t always accurately reflect the amount of cash that a company brings in. PWR’s free cash flow (“FCF”) per share for the trailing twelve months was +0.13. Comparatively, QFIN’s free cash flow per share was -. On a percent-of-sales basis, PWR’s free cash flow was 0.17% while QFIN converted 0% of its revenues into cash flow. This means that, for a given level of sales, PWR 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. PWR has a current ratio of 1.80 compared to 1.90 for QFIN. This means that QFIN can more easily cover its most immediate liabilities over the next twelve months. PWR’s debt-to-equity ratio is 0.48 versus a D/E of 0.23 for QFIN. PWR is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

PWR trades at a forward P/E of 10.67, a P/B of 1.54, and a P/S of 0.49, compared to a forward P/E of 2.33, a P/B of 1.43, and a P/S of 1.16 for QFIN. PWR is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B 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. PWR is currently priced at a -15.59% to its one-year price target of 49.00. Comparatively, QFIN is -37.34% relative to its price target of 15.13. This suggests that QFIN is the better investment over the next year.

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. PWR has a short ratio of 4.63 compared to a short interest of 0.98 for QFIN. This implies that the market is currently less bearish on the outlook for QFIN.

Summary

360 Finance, Inc. (NASDAQ:QFIN) beats Quanta Services, Inc. (NYSE:PWR) on a total of 9 of the 14 factors compared between the two stocks. QFIN is growing fastly, higher liquidity and has lower financial risk. In terms of valuation, QFIN is the cheaper of the two stocks on an earnings and book value, QFIN is more undervalued relative to its price target. Finally, QFIN has better sentiment signals based on short interest.