Senseonics Holdings, Inc. (NYSE:SENS) and Varian Medical Systems, Inc. (NYSE:VAR) are the two most active stocks in the Medical Appliances & Equipment 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 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. EBITDA margin of 17.08% for Varian Medical Systems, Inc. (VAR). SENS’s ROI is -298.80% while VAR has a ROI of 16.50%. The interpretation is that VAR’s business generates a higher return on investment than SENS’s.
If there’s one thing investors care more about than earnings, it’s cash flow. SENS’s free cash flow (“FCF”) per share for the trailing twelve months was -0.12. Comparatively, VAR’s free cash flow per share was +1.59. On a percent-of-sales basis, SENS’s free cash flow was -4.9% while VAR converted 4.54% of its revenues into cash flow. This means that, for a given level of sales, VAR 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. SENS has a current ratio of 3.00 compared to 1.60 for VAR. This means that SENS can more easily cover its most immediate liabilities over the next twelve months. SENS’s debt-to-equity ratio is 2.02 versus a D/E of 0.26 for VAR. SENS is therefore the more solvent of the two companies, and has lower financial risk.
SENS trades at a forward a P/B of 24.92, and a P/S of 234.01, compared to a forward P/E of 23.31, a P/B of 6.83, and a P/S of 3.34 for VAR. 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
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. SENS is currently priced at a -30.95% to its one-year price target of $4.33. Comparatively, VAR is -0.78% relative to its price target of $104.29. This suggests that SENS 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 1.30 for SENS and 2.50 for VAR, which implies that analysts are more bullish on the outlook for VAR.
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. SENS has a short ratio of 4.78 compared to a short interest of 9.50 for VAR. This implies that the market is currently less bearish on the outlook for SENS.
Varian Medical Systems, Inc. (NYSE:VAR) beats Senseonics Holdings, Inc. (NYSE:SENS) on a total of 6 of the 10 factors compared between the two stocks. VAR higher liquidity, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, VAR is the cheaper of the two stocks on book value and sales basis, Finally, HSIC has better sentiment signals based on short interest.