Danaher Corporation (NYSE:DHR) shares are up more than 19.14% this year and recently decreased -0.26% or -$0.24 to settle at $92.50. Flowserve Corporation (NYSE:FLS), on the other hand, is down -12.51% year to date as of 12/05/2017. It currently trades at $42.14 and has returned 2.24% during the past week.
Danaher Corporation (NYSE:DHR) and Flowserve Corporation (NYSE:FLS) are the two most active stocks in the Diversified Machinery industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
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 DHR to grow earnings at a 8.51% annual rate over the next 5 years. Comparatively, FLS is expected to grow at a 7.00% annual rate. All else equal, DHR’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 12.35% for Flowserve Corporation (FLS). DHR’s ROI is 6.00% while FLS has a ROI of 6.00%. The interpretation is that DHR’s business generates a higher return on investment than FLS’s.
If there’s one thing investors care more about than earnings, it’s cash flow. DHR’s free cash flow (“FCF”) per share for the trailing twelve months was +1.18. Comparatively, FLS’s free cash flow per share was -0.08. On a percent-of-sales basis, DHR’s free cash flow was 4.86% while FLS converted -0.26% of its revenues into cash flow. This means that, for a given level of sales, DHR 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. DHR has a current ratio of 1.40 compared to 2.10 for FLS. This means that FLS can more easily cover its most immediate liabilities over the next twelve months. DHR’s debt-to-equity ratio is 0.43 versus a D/E of 0.91 for FLS. FLS is therefore the more solvent of the two companies, and has lower financial risk.
DHR trades at a forward P/E of 21.39, a P/B of 2.54, and a P/S of 3.60, compared to a forward P/E of 23.11, a P/B of 3.14, and a P/S of 1.49 for FLS. 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 isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. DHR is currently priced at a -5.03% to its one-year price target of 97.40. Comparatively, FLS is -3.04% relative to its price target of 43.46. This suggests that DHR 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 1.80 for DHR and 2.70 for FLS, which implies that analysts are more bullish on the outlook for FLS.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. DHR has a beta of 1.03 and FLS’s beta is 1.54. DHR’s shares are therefore the less volatile of the two stocks.
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. DHR has a short ratio of 2.24 compared to a short interest of 6.64 for FLS. This implies that the market is currently less bearish on the outlook for DHR.
Danaher Corporation (NYSE:DHR) beats Flowserve Corporation (NYSE:FLS) on a total of 12 of the 14 factors compared between the two stocks. DHR is growing fastly, is more profitable, 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, DHR is the cheaper of the two stocks on an earnings and book value, DHR is more undervalued relative to its price target. Finally, DHR has better sentiment signals based on short interest.