Calgon Carbon Corporation (NYSE:CCC) shares are up more than 25.88% this year and recently decreased -0.23% or -$0.05 to settle at $21.40. Energy Recovery, Inc. (NASDAQ:ERII), on the other hand, is down -7.83% year to date as of 11/13/2017. It currently trades at $9.54 and has returned -3.25% during the past week.
Calgon Carbon Corporation (NYSE:CCC) and Energy Recovery, Inc. (NASDAQ:ERII) are the two most active stocks in the Pollution & Treatment Controls 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.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect CCC to grow earnings at a 7.00% annual rate over the next 5 years. Comparatively, ERII is expected to grow at a 20.00% annual rate. All else equal, ERII’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 EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 13.28% for Energy Recovery, Inc. (ERII). CCC’s ROI is 3.00% while ERII has a ROI of 1.10%. The interpretation is that CCC’s business generates a higher return on investment than ERII’s.
If there’s one thing investors care more about than earnings, it’s cash flow. CCC’s free cash flow (“FCF”) per share for the trailing twelve months was +0.10. Comparatively, ERII’s free cash flow per share was +0.01. On a percent-of-sales basis, CCC’s free cash flow was 0% while ERII converted 0% of its revenues into cash flow. This means that, for a given level of sales, CCC 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. CCC has a current ratio of 2.80 compared to 6.70 for ERII. This means that ERII can more easily cover its most immediate liabilities over the next twelve months. CCC’s debt-to-equity ratio is 0.60 versus a D/E of 0.00 for ERII. CCC is therefore the more solvent of the two companies, and has lower financial risk.
CCC trades at a forward P/E of 29.52, a P/B of 2.63, and a P/S of 1.82, compared to a forward P/E of 24.34, a P/B of 7.51, and a P/S of 8.78 for ERII. 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. CCC is currently priced at a 9.74% to its one-year price target of 19.50. Comparatively, ERII is -46.01% relative to its price target of 17.67. This suggests that ERII 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 3.40 for CCC and 1.80 for ERII, which implies that analysts are more bullish on the outlook for CCC.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. CCC has a beta of 1.25 and ERII’s beta is 5.60. CCC’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.CCC has a short ratio of 3.14 compared to a short interest of 17.49 for ERII. This implies that the market is currently less bearish on the outlook for CCC.
Energy Recovery, Inc. (NASDAQ:ERII) beats Calgon Carbon Corporation (NYSE:CCC) on a total of 7 of the 14 factors compared between the two stocks. ERII generates a higher return on investment, is more profitable, higher liquidity and has lower financial risk. ERII is more undervalued relative to its price target. Finally, OME has better sentiment signals based on short interest.