First Solar, Inc. (NASDAQ:FSLR) and Ultra Clean Holdings, Inc. (NASDAQ:UCTT) are the two most active stocks in the Semiconductor – Specialized 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.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use Return on Investment (ROI) to measure this. FSLR’s ROI is -10.40% while UCTT has a ROI of 4.80%. The interpretation is that UCTT’s business generates a higher return on investment than FSLR’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. FSLR’s free cash flow (“FCF”) per share for the trailing twelve months was -2.60. Comparatively, UCTT’s free cash flow per share was +0.24. On a percent-of-sales basis, FSLR’s free cash flow was -9.2% while UCTT converted 0% of its revenues into cash flow. This means that, for a given level of sales, UCTT 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. FSLR has a current ratio of 6.80 compared to 2.20 for UCTT. This means that FSLR can more easily cover its most immediate liabilities over the next twelve months. FSLR’s debt-to-equity ratio is 0.06 versus a D/E of 0.24 for UCTT. UCTT is therefore the more solvent of the two companies, and has lower financial risk.
FSLR trades at a forward P/E of 37.16, a P/B of 0.95, and a P/S of 1.88, compared to a forward P/E of 12.44, a P/B of 3.93, and a P/S of 1.32 for UCTT. FSLR is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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. FSLR is currently priced at a -10.54% to its one-year price target of $53.58. Comparatively, UCTT is 1.94% relative to its price target of $29.40. This suggests that FSLR 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 FSLR and 2.20 for UCTT, which implies that analysts are more bullish on the outlook for FSLR.
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. FSLR has a beta of 1.88 and UCTT’s beta is 1.28. UCTT’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. FSLR has a short ratio of 4.82 compared to a short interest of 1.96 for UCTT. This implies that the market is currently less bearish on the outlook for UCTT.
Ultra Clean Holdings, Inc. (NASDAQ:UCTT) beats First Solar, Inc. (NASDAQ:FSLR) on a total of 9 of the 13 factors compared between the two stocks. UCTT higher liquidity, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, UCTT is the cheaper of the two stocks on an earnings and sales basis, Finally, UCTT has better sentiment signals based on short interest.