Cummins Inc. (NYSE:CMI) shares are up more than 20.61% this year and recently increased 0.87% or $1.44 to settle at $166.28. Gardner Denver Holdings, Inc. (NYSE:GDI), on the other hand, is up 47.68% year to date as of 12/05/2017. It currently trades at $31.52 and has returned -0.22% during the past week.
Cummins Inc. (NYSE:CMI) and Gardner Denver Holdings, Inc. (NYSE:GDI) are the two most active stocks in the Diversified Machinery industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect CMI to grow earnings at a 13.87% annual rate over the next 5 years.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. 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 18.52% for Gardner Denver Holdings, Inc. (GDI). CMI’s ROI is 16.70% while GDI has a ROI of 4.50%. The interpretation is that CMI’s business generates a higher return on investment than GDI’s.
Cash is king when it comes to investing. CMI’s free cash flow (“FCF”) per share for the trailing twelve months was +2.19. Comparatively, GDI’s free cash flow per share was +0.26. On a percent-of-sales basis, CMI’s free cash flow was 2.08% while GDI converted 2.63% of its revenues into cash flow. This means that, for a given level of sales, GDI is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. CMI has a current ratio of 1.60 compared to 2.50 for GDI. This means that GDI can more easily cover its most immediate liabilities over the next twelve months. CMI’s debt-to-equity ratio is 0.30 versus a D/E of 1.59 for GDI. GDI is therefore the more solvent of the two companies, and has lower financial risk.
CMI trades at a forward P/E of 14.19, a P/B of 3.59, and a P/S of 1.41, compared to a forward P/E of 19.82, a P/B of 4.93, and a P/S of 2.74 for GDI. CMI 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.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. CMI has a short ratio of 3.22 compared to a short interest of 2.94 for GDI. This implies that the market is currently less bearish on the outlook for GDI.
Cummins Inc. (NYSE:CMI) beats Gardner Denver Holdings, Inc. (NYSE:GDI) on a total of 8 of the 13 factors compared between the two stocks. CMI is growing fastly, generates a higher return on investment, has higher cash flow per share and has lower financial risk. In terms of valuation, CMI is the cheaper of the two stocks on an earnings, book value and sales basis,