Eastman Chemical Company (NYSE:EMN) shares are up more than 7.21% this year and recently increased 0.01% or $0.01 to settle at $78.38. RTI Surgical Holdings, Inc. (NASDAQ:RTIX), on the other hand, is down -51.08% year to date as of 12/02/2019. It currently trades at $1.81 and has returned -4.23% during the past week.
Eastman Chemical Company (NYSE:EMN) and RTI Surgical Holdings, Inc. (NASDAQ:RTIX) are the two most active stocks in the Chemicals – Major Diversified industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect EMN to grow earnings at a 4.26% annual rate over the next 5 years. Comparatively, RTIX is expected to grow at a 15.00% annual rate. All else equal, RTIX’s higher growth rate would imply a greater potential for capital appreciation.
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. Eastman Chemical Company (EMN) has an EBITDA margin of 19.12%. This suggests that EMN underlying business is more profitable EMN’s ROI is 10.90% while RTIX has a ROI of 0.40%. The interpretation is that EMN’s business generates a higher return on investment than RTIX’s.Cash Flow
If there’s one thing investors care more about than earnings, it’s cash flow. EMN’s free cash flow (“FCF”) per share for the trailing twelve months was +1.60. Comparatively, RTIX’s free cash flow per share was +0.02. On a percent-of-sales basis, EMN’s free cash flow was 2.14% while RTIX converted 0% of its revenues into cash flow. This means that, for a given level of sales, EMN is able to generate more free cash flow for investors.
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. EMN has a current ratio of 1.70 compared to 3.90 for RTIX. This means that RTIX can more easily cover its most immediate liabilities over the next twelve months. EMN’s debt-to-equity ratio is 1.03 versus a D/E of 0.00 for RTIX. EMN is therefore the more solvent of the two companies, and has lower financial risk.Valuation
EMN trades at a forward P/E of 9.93, a P/B of 1.78, and a P/S of 1.14, compared to a forward P/E of 30.17, a P/B of 0.58, and a P/S of 0.44 for RTIX. EMN is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. EMN is currently priced at a -9.39% to its one-year price target of 86.50. Comparatively, RTIX is -68.52% relative to its price target of 5.75. This suggests that RTIX 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. EMN has a beta of 1.40 and RTIX’s beta is 1.24. RTIX’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. EMN has a short ratio of 2.69 compared to a short interest of 6.58 for RTIX. This implies that the market is currently less bearish on the outlook for EMN.
RTI Surgical Holdings, Inc. (NASDAQ:RTIX) beats Eastman Chemical Company (NYSE:EMN) on a total of 8 of the 14 factors compared between the two stocks. RTIX is more profitable, higher liquidity and has lower financial risk. In terms of valuation, RTIX is the cheaper of the two stocks on book value and sales basis, RTIX is more undervalued relative to its price target.