Markets

Critical Comparison: TAL Education Group (TAL) vs. Aaron’s, Inc. (AAN)

TAL Education Group (NYSE:TAL) and Aaron’s, Inc. (NYSE:AAN) are the two most active stocks in the Rental & Leasing Services industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect TAL to grow earnings at a 58.10% annual rate over the next 5 years. Comparatively, AAN is expected to grow at a 12.00% annual rate. All else equal, TAL’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 Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. TAL’s ROI is 8.40% while AAN has a ROI of 8.30%. The interpretation is that TAL’s business generates a higher return on investment than AAN’s.

Cash Flow 

The amount of free cash flow available to investors is ultimately what determines the value of a stock. On a percent-of-sales basis, TAL’s free cash flow was 0% while AAN converted -0.15% of its revenues into cash flow. This means that, for a given level of sales, TAL is able to generate more free cash flow for investors.




Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. TAL’s debt-to-equity ratio is 0.62 versus a D/E of 0.26 for AAN. TAL is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

TAL trades at a forward P/E of 62.26, a P/B of 24.54, and a P/S of 14.42, compared to a forward P/E of 15.03, a P/B of 2.04, and a P/S of 0.98 for AAN. TAL is the expensive 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

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. TAL is currently priced at a 6.78% to its one-year price target of $31.72. Comparatively, AAN is -9.76% relative to its price target of $49.39. This suggests that AAN 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 TAL and 2.00 for AAN, which implies that analysts are more bullish on the outlook for AAN.

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. TAL has a beta of 0.27 and AAN’s beta is 0.21. AAN’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. TAL has a short ratio of 3.47 compared to a short interest of 5.05 for AAN. This implies that the market is currently less bearish on the outlook for TAL.

Summary

Aaron’s, Inc. (NYSE:AAN) beats TAL Education Group (NYSE:TAL) on a total of 7 of the 13 factors compared between the two stocks. AAN is growing fastly and has lower financial risk. In terms of valuation, AAN is the cheaper of the two stocks on an earnings, book value and sales basis, AAN is more undervalued relative to its price target. Finally, GGP has better sentiment signals based on short interest.

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