Adtalem Global Education Inc. (NYSE:ATGE) shares are up more than 40.71% this year and recently decreased -0.97% or -$0.43 to settle at $43.47. Chegg, Inc. (NYSE:CHGG), on the other hand, is up 96.21% year to date as of 12/05/2017. It currently trades at $14.54 and has returned -6.70% during the past week.
Adtalem Global Education Inc. (NYSE:ATGE) and Chegg, Inc. (NYSE:CHGG) are the two most active stocks in the Education & Training Services industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect ATGE to grow earnings at a 6.40% annual rate over the next 5 years. Comparatively, CHGG is expected to grow at a 25.00% annual rate. All else equal, CHGG’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. Adtalem Global Education Inc. (ATGE) has an EBITDA margin of 6.19%. This suggests that ATGE underlying business is more profitable ATGE’s ROI is 7.10% while CHGG has a ROI of -18.80%. The interpretation is that ATGE’s business generates a higher return on investment than CHGG’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. ATGE’s free cash flow (“FCF”) per share for the trailing twelve months was +1.21. Comparatively, CHGG’s free cash flow per share was +0.06. On a percent-of-sales basis, ATGE’s free cash flow was 4.06% while CHGG converted 0% of its revenues into cash flow. This means that, for a given level of sales, ATGE 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. ATGE has a current ratio of 1.20 compared to 3.70 for CHGG. This means that CHGG can more easily cover its most immediate liabilities over the next twelve months. ATGE’s debt-to-equity ratio is 0.08 versus a D/E of 0.00 for CHGG. ATGE is therefore the more solvent of the two companies, and has lower financial risk.
ATGE trades at a forward P/E of 13.92, a P/B of 1.66, and a P/S of 1.48, compared to a forward P/E of 32.47, a P/B of 4.04, and a P/S of 6.28 for CHGG. ATGE 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. ATGE is currently priced at a 6.47% to its one-year price target of 40.83. Comparatively, CHGG is -20.98% relative to its price target of 18.40. This suggests that CHGG 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 2.40 for ATGE and 1.90 for CHGG, which implies that analysts are more bullish on the outlook for ATGE.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. ATGE has a beta of 0.97 and CHGG’s beta is 1.79. ATGE’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. ATGE has a short ratio of 14.22 compared to a short interest of 23.77 for CHGG. This implies that the market is currently less bearish on the outlook for ATGE.
Adtalem Global Education Inc. (NYSE:ATGE) beats Chegg, Inc. (NYSE:CHGG) on a total of 9 of the 14 factors compared between the two stocks. ATGE is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, ATGE is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, ATGE has better sentiment signals based on short interest.