3M Company (NYSE:MMM) shares are up more than 33.43% this year and recently increased 0.92% or $2.2 to settle at $240.46. AMETEK, Inc. (NYSE:AME), on the other hand, is up 46.19% year to date as of 12/05/2017. It currently trades at $71.32 and has returned -1.32% during the past week.
3M Company (NYSE:MMM) and AMETEK, Inc. (NYSE:AME) are the two most active stocks in the Diversified Machinery 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect MMM to grow earnings at a 10.00% annual rate over the next 5 years. Comparatively, AME is expected to grow at a 9.35% annual rate. All else equal, MMM’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 24.93% for AMETEK, Inc. (AME). MMM’s ROI is 23.80% while AME has a ROI of 11.10%. The interpretation is that MMM’s business generates a higher return on investment than AME’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. MMM’s free cash flow (“FCF”) per share for the trailing twelve months was +1.18. Comparatively, AME’s free cash flow per share was +0.86. On a percent-of-sales basis, MMM’s free cash flow was 2.33% while AME converted 5.18% of its revenues into cash flow. This means that, for a given level of sales, AME is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. MMM has a current ratio of 2.10 compared to 1.60 for AME. This means that MMM can more easily cover its most immediate liabilities over the next twelve months. MMM’s debt-to-equity ratio is 0.96 versus a D/E of 0.65 for AME. MMM is therefore the more solvent of the two companies, and has lower financial risk.
MMM trades at a forward P/E of 24.73, a P/B of 11.73, and a P/S of 4.59, compared to a forward P/E of 24.70, a P/B of 4.35, and a P/S of 3.92 for AME. MMM is the expensive 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
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. MMM is currently priced at a 13258.89% to its one-year price target of 1.80. Comparatively, AME is -4% relative to its price target of 74.29. This suggests that AME is the better investment over the next year.
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. MMM has a beta of 1.08 and AME’s beta is 1.35. MMM’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. MMM has a short ratio of 3.47 compared to a short interest of 1.73 for AME. This implies that the market is currently less bearish on the outlook for AME.
AMETEK, Inc. (NYSE:AME) beats 3M Company (NYSE:MMM) on a total of 7 of the 14 factors compared between the two stocks. AME is growing fastly and has lower financial risk. In terms of valuation, AME is the cheaper of the two stocks on an earnings, book value and sales basis, AME is more undervalued relative to its price target. Finally, AME has better sentiment signals based on short interest.