HP Inc. (NYSE:HPQ) shares are up more than 41.98% this year and recently decreased -0.76% or -$0.16 to settle at $20.91. Diebold Nixdorf, Incorporated (NYSE:DBD), on the other hand, is down -26.44% year to date as of 12/05/2017. It currently trades at $18.45 and has returned -4.39% during the past week.
HP Inc. (NYSE:HPQ) and Diebold Nixdorf, Incorporated (NYSE:DBD) are the two most active stocks in the Diversified Computer Systems industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
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 HPQ to grow earnings at a 7.53% annual rate over the next 5 years. Comparatively, DBD is expected to grow at a 29.69% annual rate. All else equal, DBD’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 2.16% for Diebold Nixdorf, Incorporated (DBD). HPQ’s ROI is 62.80% while DBD has a ROI of -3.90%. The interpretation is that HPQ’s business generates a higher return on investment than DBD’s.
The value of a stock is simply the present value of its future free cash flows. HPQ’s free cash flow (“FCF”) per share for the trailing twelve months was +0.17. Comparatively, DBD’s free cash flow per share was -0.96. On a percent-of-sales basis, HPQ’s free cash flow was 0.55% while DBD converted -2.19% of its revenues into cash flow. This means that, for a given level of sales, HPQ 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. HPQ has a current ratio of 1.00 compared to 1.50 for DBD. This means that DBD can more easily cover its most immediate liabilities over the next twelve months.
HPQ trades at a forward P/E of 11.07, and a P/S of 0.68, compared to a forward P/E of 12.12, a P/B of 2.44, and a P/S of 0.32 for DBD. 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. HPQ is currently priced at a -12.18% to its one-year price target of 23.81. Comparatively, DBD is -25.69% relative to its price target of 24.83. This suggests that DBD 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 2.10 for HPQ and 2.10 for DBD, which implies that analysts are equally bullish on their outlook for the two stocks.
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. HPQ has a beta of 1.83 and DBD’s beta is 1.92. HPQ’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. HPQ has a short ratio of 3.42 compared to a short interest of 17.34 for DBD. This implies that the market is currently less bearish on the outlook for HPQ.
HP Inc. (NYSE:HPQ) beats Diebold Nixdorf, Incorporated (NYSE:DBD) on a total of 9 of the 14 factors compared between the two stocks. HPQ 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, HPQ is the cheaper of the two stocks on an earnings and book value, Finally, HPQ has better sentiment signals based on short interest.