Olin Corporation (NYSE:OLN) and PPG Industries, Inc. (NYSE:PPG) are the two most active stocks in the Specialty Chemicals 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.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect OLN to grow earnings at a 18.50% annual rate over the next 5 years. Comparatively, PPG is expected to grow at a 9.92% annual rate. All else equal, OLN’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Olin Corporation (OLN) has an EBITDA margin of 13.24%, compared to an EBITDA margin of 11.85% for PPG Industries, Inc. (PPG). This suggests that OLN underlying business is more profitable. OLN’s ROI is 3.10% while PPG has a ROI of 6.50%. The interpretation is that PPG’s business generates a higher return on investment than OLN’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. OLN’s free cash flow (“FCF”) per share for the trailing twelve months was +0.16. Comparatively, PPG’s free cash flow per share was +1.02. On a percent-of-sales basis, OLN’s free cash flow was 0.48% while PPG converted 1.77% of its revenues into cash flow. This means that, for a given level of sales, PPG 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. OLN has a current ratio of 1.70 compared to 1.60 for PPG. This means that OLN can more easily cover its most immediate liabilities over the next twelve months. OLN’s debt-to-equity ratio is 1.59 versus a D/E of 0.82 for PPG. OLN is therefore the more solvent of the two companies, and has lower financial risk.
OLN trades at a forward P/E of 17.76, a P/B of 2.70, and a P/S of 1.04, compared to a forward P/E of 16.69, a P/B of 5.16, and a P/S of 1.98 for PPG. 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. OLN is currently priced at a 3.32% to its one-year price target of $35.50. Comparatively, PPG is -2.06% relative to its price target of $115.41. This suggests that PPG 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 2.10 for OLN and 2.30 for PPG, which implies that analysts are more bullish on the outlook for PPG.
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. OLN has a beta of 1.40 and PPG’s beta is 1.55. OLN’s shares are therefore the less volatile of the two stocks.
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. OLN has a short ratio of 2.63 compared to a short interest of 3.65 for PPG. This implies that the market is currently less bearish on the outlook for OLN.
Olin Corporation (NYSE:OLN) beats PPG Industries, Inc. (NYSE:PPG) on a total of 8 of the 14 factors compared between the two stocks. OLN is growing fastly, is more profitable and higher liquidity. In terms of valuation, OLN is the cheaper of the two stocks on book value and sales basis, Finally, OLN has better sentiment signals based on short interest.