Tronox Holdings plc (TROX) vs. Inphi Corporation (IPHI): Breaking Down the Chemicals – Major Diversified Industry’s Two Hottest Stocks

Tronox Holdings plc (NYSE:TROX) shares are up more than 47.04% this year and recently decreased -1.21% or -$0.14 to settle at $11.44. Inphi Corporation (NYSE:IPHI), on the other hand, is up 111.94% year to date as of 12/02/2019. It currently trades at $68.14 and has returned -0.64% during the past week.

Tronox Holdings plc (NYSE:TROX) and Inphi Corporation (NYSE:IPHI) are the two most active stocks in the Chemicals – Major Diversified 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 TROX to grow earnings at a 10.00% annual rate over the next 5 years. Comparatively, IPHI is expected to grow at a 20.00% annual rate. All else equal, IPHI’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. 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 12.1% for Inphi Corporation (IPHI). TROX’s ROI is 4.10% while IPHI has a ROI of -8.10%. The interpretation is that TROX’s business generates a higher return on investment than IPHI’s.

Cash Flow

Cash is king when it comes to investing. TROX’s free cash flow (“FCF”) per share for the trailing twelve months was -0.11. Comparatively, IPHI’s free cash flow per share was +0.46. On a percent-of-sales basis, TROX’s free cash flow was -0.86% while IPHI converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, IPHI is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. TROX has a current ratio of 3.30 compared to 7.60 for IPHI. This means that IPHI can more easily cover its most immediate liabilities over the next twelve months. TROX’s debt-to-equity ratio is 4.68 versus a D/E of 0.00 for IPHI. TROX is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

TROX trades at a forward P/E of 7.59, a P/B of 2.44, and a P/S of 0.68, compared to a forward P/E of 32.65, a P/B of 8.92, and a P/S of 9.08 for IPHI. TROX is the cheaper of the two stocks on an earnings, book value and sales basis. 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”. TROX is currently priced at a -24.98% to its one-year price target of 15.25. Comparatively, IPHI is -11.6% relative to its price target of 77.08. This suggests that TROX 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. TROX has a beta of 3.50 and IPHI’s beta is 1.56. IPHI’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. TROX has a short ratio of 8.30 compared to a short interest of 4.78 for IPHI. This implies that the market is currently less bearish on the outlook for IPHI.

Summary

Inphi Corporation (NYSE:IPHI) beats Tronox Holdings plc (NYSE:TROX) on a total of 8 of the 14 factors compared between the two stocks. IPHI is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, TROX is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, IPHI has better sentiment signals based on short interest.