The Kraft Heinz Company (NASDAQ:KHC) shares are down more than -7.65% this year and recently decreased -0.43% or -$0.35 to settle at $80.29. Blue Buffalo Pet Products, Inc. (NASDAQ:BUFF), on the other hand, is up 27.50% year to date as of 12/05/2017. It currently trades at $31.17 and has returned 0.23% during the past week.
The Kraft Heinz Company (NASDAQ:KHC) and Blue Buffalo Pet Products, Inc. (NASDAQ:BUFF) are the two most active stocks in the Food – Major Diversified 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.
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 KHC to grow earnings at a 9.87% annual rate over the next 5 years. Comparatively, BUFF is expected to grow at a 15.48% annual rate. All else equal, BUFF’s higher growth rate would imply a greater potential for capital appreciation.
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 EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 22.74% for Blue Buffalo Pet Products, Inc. (BUFF). KHC’s ROI is 5.30% while BUFF has a ROI of 27.30%. The interpretation is that BUFF’s business generates a higher return on investment than KHC’s.
Cash is king when it comes to investing. KHC’s free cash flow (“FCF”) per share for the trailing twelve months was -1.52. Comparatively, BUFF’s free cash flow per share was +0.10. On a percent-of-sales basis, KHC’s free cash flow was -6.99% while BUFF converted 1.7% of its revenues into cash flow. This means that, for a given level of sales, BUFF 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. KHC has a current ratio of 0.80 compared to 4.20 for BUFF. This means that BUFF can more easily cover its most immediate liabilities over the next twelve months. KHC’s debt-to-equity ratio is 0.54 versus a D/E of 1.62 for BUFF. BUFF is therefore the more solvent of the two companies, and has lower financial risk.
KHC trades at a forward P/E of 20.82, a P/B of 1.67, and a P/S of 3.73, compared to a forward P/E of 29.67, a P/B of 24.72, and a P/S of 4.84 for BUFF. KHC 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. KHC is currently priced at a -11.08% to its one-year price target of 90.29. Comparatively, BUFF is 2.77% relative to its price target of 30.33. This suggests that KHC 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 KHC and 2.10 for BUFF, which implies that analysts are more bullish on the outlook for KHC.
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. KHC has a short ratio of 4.80 compared to a short interest of 9.19 for BUFF. This implies that the market is currently less bearish on the outlook for KHC.
The Kraft Heinz Company (NASDAQ:KHC) beats Blue Buffalo Pet Products, Inc. (NASDAQ:BUFF) on a total of 7 of the 14 factors compared between the two stocks. KHC is more profitable and has lower financial risk. In terms of valuation, KHC is the cheaper of the two stocks on an earnings, book value and sales basis, KHC is more undervalued relative to its price target. Finally, KHC has better sentiment signals based on short interest.