Comparing The Travelers Companies, Inc. (TRV) and Lumber Liquidators Holdings, Inc. (LL)

The Travelers Companies, Inc. (NYSE:TRV) shares are up more than 12.95% this year and recently decreased -1.07% or -$1.46 to settle at $135.26. Lumber Liquidators Holdings, Inc. (NYSE:LL), on the other hand, is down -7.98% year to date as of 12/02/2019. It currently trades at $8.76 and has returned 3.55% during the past week.

The Travelers Companies, Inc. (NYSE:TRV) and Lumber Liquidators Holdings, Inc. (NYSE:LL) are the two most active stocks in the Property & Casualty Insurance industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

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 TRV to grow earnings at a 9.70% annual rate over the next 5 years. Comparatively, LL is expected to grow at a 30.00% annual rate. All else equal, LL’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. The Travelers Companies, Inc. (TRV) has an EBITDA margin of 27.06%. This suggests that TRV underlying business is more profitable TRV’s ROI is 9.80% while LL has a ROI of -24.30%. The interpretation is that TRV’s business generates a higher return on investment than LL’s.

Cash Flow

Earnings don’t always accurately reflect the amount of cash that a company brings in. TRV’s free cash flow (“FCF”) per share for the trailing twelve months was +6.83. Comparatively, LL’s free cash flow per share was -0.26. On a percent-of-sales basis, TRV’s free cash flow was 5.82% while LL converted -0.69% of its revenues into cash flow. This means that, for a given level of sales, TRV is able to generate more free cash flow for investors.

Liquidity and Financial Risk

TRV’s debt-to-equity ratio is 0.26 versus a D/E of 0.62 for LL. LL is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

TRV trades at a forward P/E of 12.58, a P/B of 1.37, and a P/S of 1.12, compared to a forward P/E of 18.40, a P/B of 1.75, and a P/S of 0.23 for LL. 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”. TRV is currently priced at a -4.11% to its one-year price target of 141.06. Comparatively, LL is -10.15% relative to its price target of 9.75. This suggests that LL is the better investment over the next year.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. TRV has a beta of 0.90 and LL’s beta is 1.90. TRV’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. TRV has a short ratio of 3.06 compared to a short interest of 7.80 for LL. This implies that the market is currently less bearish on the outlook for TRV.

Summary

The Travelers Companies, Inc. (NYSE:TRV) beats Lumber Liquidators Holdings, Inc. (NYSE:LL) on a total of 9 of the 14 factors compared between the two stocks. TRV is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, TRV is the cheaper of the two stocks on an earnings and book value, Finally, TRV has better sentiment signals based on short interest.