Hostess Brands, Inc. (NASDAQ:TWNK) and Omega Protein Corporation (NYSE:OME) are the two most active stocks in the Processed & Packaged Goods 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.
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 TWNK to grow earnings at a 8.80% annual rate over the next 5 years. Comparatively, OME is expected to grow at a 8.00% annual rate. All else equal, TWNK’s higher growth rate would imply a greater potential for capital appreciation.
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 Return on Investment (ROI) to measure this. TWNK’s ROI is 6.40% while OME has a ROI of 10.50%. The interpretation is that OME’s business generates a higher return on investment than TWNK’s.
If there’s one thing investors care more about than earnings, it’s cash flow. TWNK’s free cash flow (“FCF”) per share for the trailing twelve months was +0.29. Comparatively, OME’s free cash flow per share was -0.63. On a percent-of-sales basis, TWNK’s free cash flow was 0% while OME converted -0% of its revenues into cash flow. This means that, for a given level of sales, TWNK 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. TWNK has a current ratio of 2.00 compared to 4.10 for OME. This means that OME can more easily cover its most immediate liabilities over the next twelve months. TWNK’s debt-to-equity ratio is 1.07 versus a D/E of 0.01 for OME. TWNK is therefore the more solvent of the two companies, and has lower financial risk.
TWNK trades at a forward P/E of 19.69, a P/B of 1.42, and a P/S of 1.66, compared to a forward P/E of 13.82, a P/B of 1.02, and a P/S of 0.99 for OME. TWNK is the expensive 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
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. TWNK is currently priced at a -29.21% to its one-year price target of $19.00. Comparatively, OME is -15.26% relative to its price target of $19.00. This suggests that TWNK is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 1.70 for TWNK and 2.30 for OME, which implies that analysts are more bullish on the outlook for OME.
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. OME’s beta is 0.23.
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. TWNK has a short ratio of 9.86 compared to a short interest of 2.27 for OME. This implies that the market is currently less bearish on the outlook for OME.
Omega Protein Corporation (NYSE:OME) beats Hostess Brands, Inc. (NASDAQ:TWNK) on a total of 7 of the 12 factors compared between the two stocks. OME is growing fastly, higher liquidity and has lower financial risk. In terms of valuation, OME is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, OME has better sentiment signals based on short interest.