ACCO Brands Corporation (NYSE:ACCO) and Ennis, Inc. (NYSE:EBF) are the two most active stocks in the Office Supplies industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
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 ACCO to grow earnings at a 10.00% annual rate over the next 5 years. Comparatively, EBF is expected to grow at a 5.00% annual rate. All else equal, ACCO’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. ACCO Brands Corporation (ACCO) has an EBITDA margin of 12.02%, compared to an EBITDA margin of 15.42% for Ennis, Inc. (EBF). This suggests that EBF underlying business is more profitable. ACCO’s ROI is 9.80% while EBF has a ROI of 9.60%. The interpretation is that ACCO’s business generates a higher return on investment than EBF’s.
If there’s one thing investors care more about than earnings, it’s cash flow. ACCO’s free cash flow (“FCF”) per share for the trailing twelve months was -0.58. Comparatively, EBF’s free cash flow per share was +0.28. On a percent-of-sales basis, ACCO’s free cash flow was -4.05% while EBF converted 0% of its revenues into cash flow. This means that, for a given level of sales, EBF 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. ACCO has a current ratio of 1.80 compared to 5.20 for EBF. This means that EBF can more easily cover its most immediate liabilities over the next twelve months. ACCO’s debt-to-equity ratio is 1.53 versus a D/E of 0.12 for EBF. ACCO is therefore the more solvent of the two companies, and has lower financial risk.
ACCO trades at a forward P/E of 9.30, a P/B of 1.67, and a P/S of 0.69, compared to a forward P/B of 1.90, and a P/S of 1.33 for EBF. 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. ACCO is currently priced at a -30.48% to its one-year price target of $15.75. Comparatively, EBF is 4.44% relative to its price target of $18.00. This suggests that ACCO 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 2.00 for ACCO and 3.00 for EBF, which implies that analysts are more bullish on the outlook for EBF.
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. ACCO has a beta of 1.39 and EBF’s beta is 0.79. EBF’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. ACCO has a short ratio of 4.54 compared to a short interest of 9.59 for EBF. This implies that the market is currently less bearish on the outlook for ACCO.
ACCO Brands Corporation (NYSE:ACCO) beats Ennis, Inc. (NYSE:EBF) on a total of 7 of the 13 factors compared between the two stocks. ACCO is growing fastly and generates a higher return on investment. In terms of valuation, ACCO is the cheaper of the two stocks on book value and sales basis, ACCO is more undervalued relative to its price target. Finally, ACCO has better sentiment signals based on short interest.