Allergan plc (NYSE:AGN) shares are down more than -21.78% this year and recently increased 1.29% or $2.12 to settle at $166.40. The Medicines Company (NASDAQ:MDCO), on the other hand, is down -20.36% year to date as of 12/05/2017. It currently trades at $26.35 and has returned -10.53% during the past week.
Allergan plc (NYSE:AGN) and The Medicines Company (NASDAQ:MDCO) are the two most active stocks in the Drugs – Generic 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.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect AGN to grow earnings at a 8.42% annual rate over the next 5 years.
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 Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. AGN’s ROI is 0.10% while MDCO has a ROI of -27.60%. The interpretation is that AGN’s business generates a higher return on investment than MDCO’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. AGN’s free cash flow (“FCF”) per share for the trailing twelve months was +3.21. Comparatively, MDCO’s free cash flow per share was -1.79. On a percent-of-sales basis, AGN’s free cash flow was 7.33% while MDCO converted -0.08% of its revenues into cash flow. This means that, for a given level of sales, AGN 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. AGN has a current ratio of 1.20 compared to 2.30 for MDCO. This means that MDCO can more easily cover its most immediate liabilities over the next twelve months. AGN’s debt-to-equity ratio is 0.46 versus a D/E of 3.42 for MDCO. MDCO is therefore the more solvent of the two companies, and has lower financial risk.
AGN trades at a forward P/E of 10.33, a P/B of 0.83, and a P/S of 3.57, compared to a P/B of 10.40, and a P/S of 24.12 for MDCO. 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. AGN is currently priced at a -27.62% to its one-year price target of 229.90. Comparatively, MDCO is -46.42% relative to its price target of 49.18. This suggests that MDCO 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 2.00 for AGN and 1.60 for MDCO, which implies that analysts are more bullish on the outlook for AGN.
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. AGN has a beta of 1.12 and MDCO’s beta is 0.69. MDCO’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. AGN has a short ratio of 2.35 compared to a short interest of 15.05 for MDCO. This implies that the market is currently less bearish on the outlook for AGN.
Allergan plc (NYSE:AGN) beats The Medicines Company (NASDAQ:MDCO) on a total of 8 of the 14 factors compared between the two stocks. AGN is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, AGN is the cheaper of the two stocks on book value and sales basis, Finally, AGN has better sentiment signals based on short interest.