Caterpillar Inc. (NYSE:CAT) shares are up more than 51.11% this year and recently increased 0.43% or $0.6 to settle at $140.74. AGCO Corporation (NYSE:AGCO), on the other hand, is up 23.57% year to date as of 12/05/2017. It currently trades at $70.91 and has returned 0.10% during the past week.
Caterpillar Inc. (NYSE:CAT) and AGCO Corporation (NYSE:AGCO) are the two most active stocks in the Farm & Construction Machinery 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect CAT to grow earnings at a 39.66% annual rate over the next 5 years. Comparatively, AGCO is expected to grow at a 23.84% annual rate. All else equal, CAT’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 7.35% for AGCO Corporation (AGCO). CAT’s ROI is 0.60% while AGCO has a ROI of 4.40%. The interpretation is that AGCO’s business generates a higher return on investment than CAT’s.
Cash is king when it comes to investing. CAT’s free cash flow (“FCF”) per share for the trailing twelve months was +0.44. Comparatively, AGCO’s free cash flow per share was -0.26. On a percent-of-sales basis, CAT’s free cash flow was 0.68% while AGCO converted -0.28% of its revenues into cash flow. This means that, for a given level of sales, CAT is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. CAT has a current ratio of 1.40 compared to 1.50 for AGCO. This means that AGCO can more easily cover its most immediate liabilities over the next twelve months. CAT’s debt-to-equity ratio is 2.30 versus a D/E of 0.68 for AGCO. CAT is therefore the more solvent of the two companies, and has lower financial risk.
CAT trades at a forward P/E of 17.94, a P/B of 5.32, and a P/S of 1.94, compared to a forward P/E of 18.58, a P/B of 1.88, and a P/S of 0.72 for AGCO. CAT is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S ratio. 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. CAT is currently priced at a -3.03% to its one-year price target of 145.14. Comparatively, AGCO is -2.72% relative to its price target of 72.89. This suggests that CAT 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 2.60 for CAT and 2.80 for AGCO, which implies that analysts are more bullish on the outlook for AGCO.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. CAT has a beta of 1.29 and AGCO’s beta is 0.83. AGCO’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.CAT has a short ratio of 3.89 compared to a short interest of 7.72 for AGCO. This implies that the market is currently less bearish on the outlook for CAT.
Caterpillar Inc. (NYSE:CAT) beats AGCO Corporation (NYSE:AGCO) on a total of 8 of the 14 factors compared between the two stocks. CAT is growing fastly, is more profitable, has higher cash flow per share and has a higher cash conversion rate. CAT is more undervalued relative to its price target. Finally, CAT has better sentiment signals based on short interest.