MEDNAX, Inc. (NYSE:MD) and DaVita Inc. (NYSE:DVA) are the two most active stocks in the Specialized Health 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.
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 MD to grow earnings at a 14.40% annual rate over the next 5 years. Comparatively, DVA is expected to grow at a 12.53% annual rate. All else equal, MD’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. MEDNAX, Inc. (MD) has an EBITDA margin of 19.13%, compared to an EBITDA margin of 9.86% for DaVita Inc. (DVA). This suggests that MD underlying business is more profitable. MD’s ROI is 8.60% while DVA has a ROI of 10.50%. The interpretation is that DVA’s business generates a higher return on investment than MD’s.
Cash is king when it comes to investing. MD’s free cash flow (“FCF”) per share for the trailing twelve months was +1.37. Comparatively, DVA’s free cash flow per share was -0.20. On a percent-of-sales basis, MD’s free cash flow was 4.03% while DVA converted -0.26% of its revenues into cash flow. This means that, for a given level of sales, MD 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. MD has a current ratio of 1.60 compared to 1.50 for DVA. This means that MD can more easily cover its most immediate liabilities over the next twelve months. MD’s debt-to-equity ratio is 0.62 versus a D/E of 1.79 for DVA. DVA is therefore the more solvent of the two companies, and has lower financial risk.
MD trades at a forward P/E of 12.31, a P/B of 1.42, and a P/S of 1.22, compared to a forward P/E of 15.74, a P/B of 2.27, and a P/S of 0.76 for DVA. 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. MD is currently priced at a -11.62% to its one-year price target of $49.30. Comparatively, DVA is -7.26% relative to its price target of $65.11. This suggests that MD 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 2.70 for MD and 2.80 for DVA, which implies that analysts are more bullish on the outlook for DVA.
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. MD has a beta of 0.37 and DVA’s beta is 0.90. MD’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. MD has a short ratio of 3.74 compared to a short interest of 4.80 for DVA. This implies that the market is currently less bearish on the outlook for MD.
MEDNAX, Inc. (NYSE:MD) beats DaVita Inc. (NYSE:DVA) on a total of 12 of the 14 factors compared between the two stocks. MD is growing fastly, is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, MD is the cheaper of the two stocks on an earnings and book value, MD is more undervalued relative to its price target. Finally, MD has better sentiment signals based on short interest.