DXC Technology Company (NYSE:DXC) and Fidelity National Information Services, Inc. (NYSE:FIS) are the two most active stocks in the Information Technology Services 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 increase earnings at a high compound rate over time are attractive to investors. Analysts expect DXC to grow earnings at a 43.80% annual rate over the next 5 years. Comparatively, FIS is expected to grow at a 12.23% annual rate. All else equal, DXC’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. DXC Technology Company (DXC) has an EBITDA margin of 8.96%, compared to an EBITDA margin of 30.25% for Fidelity National Information Services, Inc. (FIS). This suggests that FIS underlying business is more profitable. DXC’s ROI is -2.30% while FIS has a ROI of 4.90%. The interpretation is that FIS’s business generates a higher return on investment than DXC’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. On a percent-of-sales basis, DXC’s free cash flow was 0% while FIS converted -0.5% of its revenues into cash flow. This means that, for a given level of sales, DXC 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. DXC has a current ratio of 1.20 compared to 1.50 for FIS. This means that FIS can more easily cover its most immediate liabilities over the next twelve months. DXC’s debt-to-equity ratio is 0.62 versus a D/E of 0.98 for FIS. FIS is therefore the more solvent of the two companies, and has lower financial risk.
DXC trades at a forward P/E of 10.33, a P/B of 2.02, and a P/S of 2.10, compared to a forward P/E of 19.18, a P/B of 3.12, and a P/S of 3.33 for FIS. DXC 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”. DXC is currently priced at a -2.76% to its one-year price target of $87.67. Comparatively, FIS is -6.54% relative to its price target of $99.92. This suggests that FIS 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 2.30 for DXC and 1.80 for FIS, which implies that analysts are more bullish on the outlook for DXC.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. DXC has a beta of 0.95 and FIS’s beta is 0.86. FIS’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. DXC has a short ratio of 2.50 compared to a short interest of 1.66 for FIS. This implies that the market is currently less bearish on the outlook for FIS.
Fidelity National Information Services, Inc. (NYSE:FIS) beats DXC Technology Company (NYSE:DXC) on a total of 7 of the 13 factors compared between the two stocks. FIS is growing fastly, generates a higher return on investment and higher liquidity. In terms of valuation, DXC is the cheaper of the two stocks on an earnings, book value and sales basis, FIS is more undervalued relative to its price target. Finally, FIS has better sentiment signals based on short interest.