Earnings

Critical Comparison: Ironwood Pharmaceuticals, Inc. (IRWD) vs. Zoetis Inc. (ZTS)

Ironwood Pharmaceuticals, Inc. (NASDAQ:IRWD) shares are up more than 3.34% this year and recently decreased -4.02% or -$0.64 to settle at $15.16. Zoetis Inc. (NYSE:ZTS), on the other hand, is up 32.36% year to date as of 12/05/2017. It currently trades at $70.63 and has returned -0.76% during the past week.

Ironwood Pharmaceuticals, Inc. (NASDAQ:IRWD) and Zoetis Inc. (NYSE:ZTS) are the two most active stocks in the Drugs – Generic 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.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Comparatively, ZTS is expected to grow at a 13.72% annual rate. All else equal, ZTS’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. EBITDA margin of 33.84% for Zoetis Inc. (ZTS).

Cash Flow 




Earnings don’t always accurately reflect the amount of cash that a company brings in. IRWD’s free cash flow (“FCF”) per share for the trailing twelve months was -0.22. Comparatively, ZTS’s free cash flow per share was +0.69. On a percent-of-sales basis, IRWD’s free cash flow was -0.01% while ZTS converted 6.88% of its revenues into cash flow. This means that, for a given level of sales, ZTS 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. IRWD has a current ratio of 4.90 compared to 2.80 for ZTS. This means that IRWD can more easily cover its most immediate liabilities over the next twelve months.

Valuation

IRWD trades at a P/S of 8.05, compared to a forward P/E of 26.05, a P/B of 17.41, and a P/S of 6.76 for ZTS. 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. IRWD is currently priced at a -11.24% to its one-year price target of 17.08. Comparatively, ZTS is -3.63% relative to its price target of 73.29. This suggests that IRWD 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 2.30 for IRWD and 2.00 for ZTS, which implies that analysts are more bullish on the outlook for IRWD.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. IRWD has a beta of 1.41 and ZTS’s beta is 1.04. ZTS’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. IRWD has a short ratio of 13.54 compared to a short interest of 3.55 for ZTS. This implies that the market is currently less bearish on the outlook for ZTS.

Summary

Zoetis Inc. (NYSE:ZTS) beats Ironwood Pharmaceuticals, Inc. (NASDAQ:IRWD) on a total of 9 of the 14 factors compared between the two stocks. ZTS higher liquidity, is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. Finally, ZTS has better sentiment signals based on short interest.

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