Heritage Insurance Holdings, Inc. (NYSE:HRTG) and Warrior Met Coal, LLC (NYSE:HCC) are the two most active stocks in the Property & Casualty Insurance industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
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. Heritage Insurance Holdings, Inc. (HRTG) has an EBITDA margin of 11.97%, compared to an EBITDA margin of 24.95% for Warrior Met Coal, LLC (HCC). This suggests that HCC underlying business is more profitable. HRTG’s ROI is 7.90% while HCC has a ROI of -13.30%. The interpretation is that HRTG’s business generates a higher return on investment than HCC’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. HRTG’s free cash flow (“FCF”) per share for the trailing twelve months was +0.96. Comparatively, HCC’s free cash flow per share was +2.69. On a percent-of-sales basis, HRTG’s free cash flow was 0.01% while HCC converted 0.04% of its revenues into cash flow. This means that, for a given level of sales, HCC is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. HRTG’s debt-to-equity ratio is 0.20 versus a D/E of 0.01 for HCC. HRTG is therefore the more solvent of the two companies, and has lower financial risk.
HRTG trades at a forward P/E of 6.10, a P/B of 0.90, and a P/S of 0.81, compared to a forward P/E of 10.31, a P/B of 1.59, and a P/S of 1.59 for HCC. HRTG 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
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. HRTG is currently priced at a -28.9% to its one-year price target of $16.40. Comparatively, HCC is -63.12% relative to its price target of $65.00. This suggests that HCC 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 HRTG and 3.00 for HCC, which implies that analysts are more bullish on the outlook for HCC.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. HRTG has a short ratio of 6.23 compared to a short interest of 3.62 for HCC. This implies that the market is currently less bearish on the outlook for HCC.
Warrior Met Coal, LLC (NYSE:HCC) beats Heritage Insurance Holdings, Inc. (NYSE:HRTG) on a total of 6 of the 11 factors compared between the two stocks. HCC generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, HRTG is the cheaper of the two stocks on an earnings, book value and sales basis, HCC is more undervalued relative to its price target. Finally, HCC has better sentiment signals based on short interest.