Critical Comparison: Advanced Disposal Services, Inc. (ADSW) vs. Redwood Trust, Inc. (RWT)

Advanced Disposal Services, Inc. (NYSE:ADSW) shares are up more than 37.30% this year and recently decreased -0.24% or -$0.08 to settle at $32.87. Redwood Trust, Inc. (NYSE:RWT), on the other hand, is up 7.83% year to date as of 12/02/2019. It currently trades at $16.25 and has returned 1.18% during the past week.

Advanced Disposal Services, Inc. (NYSE:ADSW) and Redwood Trust, Inc. (NYSE:RWT) are the two most active stocks in the Waste Management 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 ADSW to grow earnings at a 19.72% annual rate over the next 5 years. Comparatively, RWT is expected to grow at a 0.36% annual rate. All else equal, ADSW’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. , compared to an EBITDA margin of 251.36% for Redwood Trust, Inc. (RWT). ADSW’s ROI is 3.40% while RWT has a ROI of 1.00%. The interpretation is that ADSW’s business generates a higher return on investment than RWT’s.

Cash Flow

If there’s one thing investors care more about than earnings, it’s cash flow. ADSW’s free cash flow (“FCF”) per share for the trailing twelve months was +0.07. Comparatively, RWT’s free cash flow per share was -4.96. On a percent-of-sales basis, ADSW’s free cash flow was 0.4% while RWT converted -0.15% of its revenues into cash flow. This means that, for a given level of sales, ADSW is able to generate more free cash flow for investors.

Liquidity and Financial Risk

ADSW’s debt-to-equity ratio is 2.03 versus a D/E of 7.44 for RWT. RWT is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

ADSW trades at a forward P/E of 54.33, a P/B of 3.18, and a P/S of 1.81, compared to a forward P/E of 9.44, a P/B of 0.93, and a P/S of 3.34 for RWT. ADSW 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

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. ADSW is currently priced at a 3.17% to its one-year price target of 31.86. Comparatively, RWT is -10.22% relative to its price target of 18.10. This suggests that RWT 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. ADSW has a short ratio of 12.96 compared to a short interest of 6.11 for RWT. This implies that the market is currently less bearish on the outlook for RWT.

Summary

Advanced Disposal Services, Inc. (NYSE:ADSW) beats Redwood Trust, Inc. (NYSE:RWT) on a total of 8 of the 14 factors compared between the two stocks. ADSW is growing fastly, 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.