Earnings

A Side-by-side Analysis of KEMET Corporation (KEM) and Amphenol Corporation (APH)

KEMET Corporation (NYSE:KEM) shares are up more than 116.44% this year and recently increased 2.58% or $0.37 to settle at $14.72. Amphenol Corporation (NYSE:APH), on the other hand, is up 31.22% year to date as of 12/05/2017. It currently trades at $87.83 and has returned -3.14% during the past week.

KEMET Corporation (NYSE:KEM) and Amphenol Corporation (NYSE:APH) are the two most active stocks in the Diversified Electronics 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.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect KEM to grow earnings at a 12.00% annual rate over the next 5 years. Comparatively, APH is expected to grow at a 10.47% annual rate. All else equal, KEM’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 23.9% for Amphenol Corporation (APH). KEM’s ROI is 5.60% while APH has a ROI of 13.40%. The interpretation is that APH’s business generates a higher return on investment than KEM’s.

Cash Flow 




The amount of free cash flow available to investors is ultimately what determines the value of a stock. KEM’s free cash flow (“FCF”) per share for the trailing twelve months was +0.33. Comparatively, APH’s free cash flow per share was +0.30. On a percent-of-sales basis, KEM’s free cash flow was 0% while APH converted 1.46% of its revenues into cash flow. This means that, for a given level of sales, APH 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. KEM has a current ratio of 2.50 compared to 3.00 for APH. This means that APH can more easily cover its most immediate liabilities over the next twelve months. KEM’s debt-to-equity ratio is 0.80 versus a D/E of 0.88 for APH. APH is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

KEM trades at a forward P/E of 8.79, a P/B of 1.72, and a P/S of 0.86, compared to a forward P/E of 25.54, a P/B of 6.61, and a P/S of 4.00 for APH. KEM is the cheaper 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

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. KEM is currently priced at a -29.06% to its one-year price target of 20.75. Comparatively, APH is -5.56% relative to its price target of 93.00. This suggests that KEM 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 2.50 for KEM and 2.10 for APH, which implies that analysts are more bullish on the outlook for KEM.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. KEM has a beta of 3.53 and APH’s beta is 0.81. APH’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. KEM has a short ratio of 1.25 compared to a short interest of 3.09 for APH. This implies that the market is currently less bearish on the outlook for KEM.

Summary

KEMET Corporation (NYSE:KEM) beats Amphenol Corporation (NYSE:APH) on a total of 9 of the 14 factors compared between the two stocks. KEM is growing fastly, is more profitable, has higher cash flow per share and has lower financial risk. In terms of valuation, KEM is the cheaper of the two stocks on an earnings, book value and sales basis, KEM is more undervalued relative to its price target. Finally, KEM has better sentiment signals based on short interest.

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