Navient Corporation (NASDAQ:NAVI) and Mastercard Incorporated (NYSE:MA) are the two most active stocks in the Credit 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 consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect NAVI to grow earnings at a 2.30% annual rate over the next 5 years. Comparatively, MA is expected to grow at a 16.77% annual rate. All else equal, MA’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. Navient Corporation (NAVI) has an EBITDA margin of 60.81%, compared to an EBITDA margin of 55.6% for Mastercard Incorporated (MA). This suggests that NAVI underlying business is more profitable. NAVI’s ROI is 0.60% while MA has a ROI of 38.50%. The interpretation is that MA’s business generates a higher return on investment than NAVI’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. NAVI’s free cash flow (“FCF”) per share for the trailing twelve months was +0.80. Comparatively, MA’s free cash flow per share was +0.94. On a percent-of-sales basis, NAVI’s free cash flow was 4.42% while MA converted 9.29% of its revenues into cash flow. This means that, for a given level of sales, MA is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. NAVI’s debt-to-equity ratio is 32.40 versus a D/E of 0.91 for MA. NAVI is therefore the more solvent of the two companies, and has lower financial risk.
NAVI trades at a forward P/E of 7.64, a P/B of 1.10, and a P/S of 2.64, compared to a forward P/E of 27.06, a P/B of 25.85, and a P/S of 13.17 for MA. NAVI 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”. NAVI is currently priced at a -18.79% to its one-year price target of $17.19. Comparatively, MA is -2.52% relative to its price target of $145.06. This suggests that NAVI 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 2.40 for NAVI and 1.90 for MA, which implies that analysts are more bullish on the outlook for NAVI.
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. NAVI has a beta of 2.42 and MA’s beta is 1.18. MA’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. NAVI has a short ratio of 3.30 compared to a short interest of 2.99 for MA. This implies that the market is currently less bearish on the outlook for MA.
Mastercard Incorporated (NYSE:MA) beats Navient Corporation (NASDAQ:NAVI) on a total of 8 of the 13 factors compared between the two stocks. MA 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. In terms of valuation, NAVI is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, MA has better sentiment signals based on short interest.