Ocean Power Technologies, Inc. (NASDAQ:OPTT) shares are down more than -60.68% this year and recently increased 0.86% or $0.01 to settle at $1.17. Illinois Tool Works Inc. (NYSE:ITW), on the other hand, is up 34.75% year to date as of 12/05/2017. It currently trades at $167.08 and has returned 0.33% during the past week.
Ocean Power Technologies, Inc. (NASDAQ:OPTT) and Illinois Tool Works Inc. (NYSE:ITW) are the two most active stocks in the Diversified Machinery industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Comparatively, ITW is expected to grow at a 10.85% annual rate. All else equal, ITW’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 26.33% for Illinois Tool Works Inc. (ITW). OPTT’s ROI is -203.50% while ITW has a ROI of 18.10%. The interpretation is that ITW’s business generates a higher return on investment than OPTT’s.
Cash is king when it comes to investing. OPTT’s free cash flow (“FCF”) per share for the trailing twelve months was -0.35. Comparatively, ITW’s free cash flow per share was +1.38. On a percent-of-sales basis, OPTT’s free cash flow was -0.76% while ITW converted 3.48% of its revenues into cash flow. This means that, for a given level of sales, ITW is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. OPTT has a current ratio of 2.10 compared to 2.40 for ITW. This means that ITW can more easily cover its most immediate liabilities over the next twelve months. OPTT’s debt-to-equity ratio is 0.00 versus a D/E of 1.62 for ITW. ITW is therefore the more solvent of the two companies, and has lower financial risk.
OPTT trades at a P/B of 3.62, and a P/S of 16.85, compared to a forward P/E of 22.90, a P/B of 11.28, and a P/S of 4.02 for ITW. 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. OPTT is currently priced at a -80.5% to its one-year price target of 6.00. Comparatively, ITW is 2.33% relative to its price target of 163.27. This suggests that OPTT 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 3.00 for OPTT and 2.30 for ITW, which implies that analysts are more bullish on the outlook for OPTT.
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. OPTT has a beta of 4.45 and ITW’s beta is 1.18. ITW’s shares are therefore the less volatile of the two stocks.
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. OPTT has a short ratio of 1.31 compared to a short interest of 4.52 for ITW. This implies that the market is currently less bearish on the outlook for OPTT.
Illinois Tool Works Inc. (NYSE:ITW) beats Ocean Power Technologies, Inc. (NASDAQ:OPTT) on a total of 9 of the 14 factors compared between the two stocks. ITW has lower financial risk, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity.