Pilgrim’s Pride Corporation (NASDAQ:PPC) shares are up more than 96.37% this year and recently increased 0.11% or $0.04 to settle at $37.33. Lamb Weston Holdings, Inc. (NYSE:LW), on the other hand, is up 43.86% year to date as of 12/05/2017. It currently trades at $54.48 and has returned 0.78% during the past week.
Pilgrim’s Pride Corporation (NASDAQ:PPC) and Lamb Weston Holdings, Inc. (NYSE:LW) are the two most active stocks in the Food – Major Diversified 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.
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 PPC to grow earnings at a -6.60% annual rate over the next 5 years. Comparatively, LW is expected to grow at a 5.40% annual rate. All else equal, LW’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., compared to an EBITDA margin of 19.97% for Lamb Weston Holdings, Inc. (LW). PPC’s ROI is 13.80% while LW has a ROI of 19.60%. The interpretation is that LW’s business generates a higher return on investment than PPC’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. PPC’s free cash flow (“FCF”) per share for the trailing twelve months was +0.88. Comparatively, LW’s free cash flow per share was +0.08. On a percent-of-sales basis, PPC’s free cash flow was 2.76% while LW converted 0.37% of its revenues into cash flow. This means that, for a given level of sales, PPC is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. PPC has a current ratio of 1.70 compared to 1.60 for LW. This means that PPC can more easily cover its most immediate liabilities over the next twelve months.
PPC trades at a forward P/E of 12.75, a P/B of 5.45, and a P/S of 0.93, compared to a forward P/E of 20.99, and a P/S of 2.48 for LW. 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. PPC is currently priced at a 12% to its one-year price target of 33.33. Comparatively, LW is 1.11% relative to its price target of 53.88. This suggests that LW 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 2.80 for PPC and 2.00 for LW, which implies that analysts are more bullish on the outlook for PPC.
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. PPC has a short ratio of 14.67 compared to a short interest of 2.37 for LW. This implies that the market is currently less bearish on the outlook for LW.
Lamb Weston Holdings, Inc. (NYSE:LW) beats Pilgrim’s Pride Corporation (NASDAQ:PPC) on a total of 9 of the 14 factors compared between the two stocks. LW has higher cash flow per share, is more profitable, generates a higher return on investment and has lower financial risk. LW is more undervalued relative to its price target. Finally, LW has better sentiment signals based on short interest.