Bed Bath & Beyond Inc. (NASDAQ:BBBY) shares are down more than -42.00% this year and recently decreased -1.48% or -$0.35 to settle at $23.22. Williams-Sonoma, Inc. (NYSE:WSM), on the other hand, is up 11.18% year to date as of 12/05/2017. It currently trades at $53.63 and has returned 14.42% during the past week.
Bed Bath & Beyond Inc. (NASDAQ:BBBY) and Williams-Sonoma, Inc. (NYSE:WSM) are the two most active stocks in the Home Furnishing Stores 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.
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. Analysts expect BBBY to grow earnings at a -14.30% annual rate over the next 5 years. Comparatively, WSM is expected to grow at a 5.26% annual rate. All else equal, WSM’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 12.51% for Williams-Sonoma, Inc. (WSM). BBBY’s ROI is 17.90% while WSM has a ROI of 24.50%. The interpretation is that WSM’s business generates a higher return on investment than BBBY’s.
Cash is king when it comes to investing. BBBY’s free cash flow (“FCF”) per share for the trailing twelve months was +0.31. Comparatively, WSM’s free cash flow per share was -0.11. On a percent-of-sales basis, BBBY’s free cash flow was 0.37% while WSM converted -0.18% of its revenues into cash flow. This means that, for a given level of sales, BBBY is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. BBBY has a current ratio of 1.80 compared to 1.30 for WSM. This means that BBBY can more easily cover its most immediate liabilities over the next twelve months. BBBY’s debt-to-equity ratio is 0.55 versus a D/E of 0.10 for WSM. BBBY is therefore the more solvent of the two companies, and has lower financial risk.
BBBY trades at a forward P/E of 8.64, a P/B of 1.21, and a P/S of 0.29, compared to a forward P/E of 14.33, a P/B of 3.91, and a P/S of 0.89 for WSM. BBBY 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
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. BBBY is currently priced at a -2.76% to its one-year price target of 23.88. Comparatively, WSM is 8.67% relative to its price target of 49.35. This suggests that BBBY 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 3.30 for BBBY and 3.00 for WSM, which implies that analysts are more bullish on the outlook for BBBY.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. BBBY has a beta of 1.08 and WSM’s beta is 0.90. WSM’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. BBBY has a short ratio of 4.85 compared to a short interest of 9.90 for WSM. This implies that the market is currently less bearish on the outlook for BBBY.
Bed Bath & Beyond Inc. (NASDAQ:BBBY) beats Williams-Sonoma, Inc. (NYSE:WSM) on a total of 8 of the 14 factors compared between the two stocks. BBBY has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, BBBY is the cheaper of the two stocks on an earnings, book value and sales basis, BBBY is more undervalued relative to its price target. Finally, BBBY has better sentiment signals based on short interest.