Exact Sciences Corporation (NASDAQ:EXAS) and Align Technology, Inc. (NASDAQ:ALGN) are the two most active stocks in the Medical Laboratories & Research 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect EXAS to grow earnings at a 22.50% annual rate over the next 5 years. Comparatively, ALGN is expected to grow at a 25.69% annual rate. All else equal, ALGN’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. EXAS’s ROI is -49.60% while ALGN has a ROI of 19.90%. The interpretation is that ALGN’s business generates a higher return on investment than EXAS’s.
If there’s one thing investors care more about than earnings, it’s cash flow. EXAS’s free cash flow (“FCF”) per share for the trailing twelve months was -0.33. Comparatively, ALGN’s free cash flow per share was +1.13. On a percent-of-sales basis, EXAS’s free cash flow was -0.04% while ALGN converted 8.39% of its revenues into cash flow. This means that, for a given level of sales, ALGN 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. EXAS has a current ratio of 16.80 compared to 2.40 for ALGN. This means that EXAS can more easily cover its most immediate liabilities over the next twelve months. EXAS’s debt-to-equity ratio is 0.01 versus a D/E of 0.00 for ALGN. EXAS is therefore the more solvent of the two companies, and has lower financial risk.
EXAS trades at a forward P/B of 8.58, and a P/S of 28.58, compared to a forward P/E of 43.08, a P/B of 13.03, and a P/S of 11.40 for ALGN. EXAS is the cheaper of the two stocks on book value basis but is expensive in terms of P/E 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. EXAS is currently priced at a -8.18% to its one-year price target of $44.75. Comparatively, ALGN is -7.04% relative to its price target of $188.58. This suggests that EXAS 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 1.80 for EXAS and 1.40 for ALGN, which implies that analysts are more bullish on the outlook for EXAS.
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. EXAS has a beta of 0.79 and ALGN’s beta is 1.55. EXAS’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. EXAS has a short ratio of 7.31 compared to a short interest of 2.27 for ALGN. This implies that the market is currently less bearish on the outlook for ALGN.
Align Technology, Inc. (NASDAQ:ALGN) beats Exact Sciences Corporation (NASDAQ:EXAS) on a total of 9 of the 13 factors compared between the two stocks. ALGN higher liquidity, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. Finally, ALGN has better sentiment signals based on short interest.