Evolent Health, Inc. (NYSE:EVH) shares are down more than -12.50% this year and recently decreased -0.77% or -$0.1 to settle at $12.85. Cerner Corporation (NASDAQ:CERN), on the other hand, is up 47.96% year to date as of 12/05/2017. It currently trades at $69.53 and has returned 0.49% during the past week.
Evolent Health, Inc. (NYSE:EVH) and Cerner Corporation (NASDAQ:CERN) are the two most active stocks in the Healthcare Information Services 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.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect EVH to grow earnings at a 30.00% annual rate over the next 5 years. Comparatively, CERN is expected to grow at a 16.53% annual rate. All else equal, EVH’s higher growth rate would imply a greater potential for capital appreciation.
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. EBITDA margin of 29.87% for Cerner Corporation (CERN). EVH’s ROI is -27.50% while CERN has a ROI of 14.00%. The interpretation is that CERN’s business generates a higher return on investment than EVH’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. EVH’s free cash flow (“FCF”) per share for the trailing twelve months was +0.03. Comparatively, CERN’s free cash flow per share was +0.86. On a percent-of-sales basis, EVH’s free cash flow was 0% while CERN converted 5.96% of its revenues into cash flow. This means that, for a given level of sales, CERN 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. EVH has a current ratio of 3.30 compared to 2.80 for CERN. This means that EVH can more easily cover its most immediate liabilities over the next twelve months. EVH’s debt-to-equity ratio is 0.12 versus a D/E of 0.12 for CERN. EVH is therefore the more solvent of the two companies, and has lower financial risk.
EVH trades at a P/B of 0.89, and a P/S of 2.41, compared to a forward P/E of 26.95, a P/B of 5.10, and a P/S of 4.52 for CERN. EVH 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.
Analyst Price Targets and Opinions
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. EVH is currently priced at a -48.76% to its one-year price target of 25.08. Comparatively, CERN is -0.76% relative to its price target of 70.06. This suggests that EVH 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 1.50 for EVH and 2.20 for CERN, which implies that analysts are more bullish on the outlook for CERN.
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. EVH has a short ratio of 7.15 compared to a short interest of 5.15 for CERN. This implies that the market is currently less bearish on the outlook for CERN.
Evolent Health, Inc. (NYSE:EVH) beats Cerner Corporation (NASDAQ:CERN) on a total of 8 of the 14 factors compared between the two stocks. EVH is growing fastly and higher liquidity. In terms of valuation, EVH is the cheaper of the two stocks on an earnings, book value and sales basis, EVH is more undervalued relative to its price target. Finally, BBBY has better sentiment signals based on short interest.