Tempur Sealy International, Inc. (NYSE:TPX) shares are down more than -17.88% this year and recently increased 3.65% or $2.05 to settle at $58.12. Fortune Brands Home & Security, Inc. (NYSE:FBHS), on the other hand, is up 28.10% year to date as of 12/05/2017. It currently trades at $68.15 and has returned 4.20% during the past week.
Tempur Sealy International, Inc. (NYSE:TPX) and Fortune Brands Home & Security, Inc. (NYSE:FBHS) are the two most active stocks in the Home Furnishings & Fixtures 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 TPX to grow earnings at a 18.70% annual rate over the next 5 years. Comparatively, FBHS is expected to grow at a 9.95% annual rate. All else equal, TPX’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 16.39% for Fortune Brands Home & Security, Inc. (FBHS). TPX’s ROI is 15.00% while FBHS has a ROI of 12.20%. The interpretation is that TPX’s business generates a higher return on investment than FBHS’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. TPX’s free cash flow (“FCF”) per share for the trailing twelve months was +2.00. Comparatively, FBHS’s free cash flow per share was +0.76. On a percent-of-sales basis, TPX’s free cash flow was 3.47% while FBHS converted 2.31% of its revenues into cash flow. This means that, for a given level of sales, TPX 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. TPX has a current ratio of 1.10 compared to 1.90 for FBHS. This means that FBHS can more easily cover its most immediate liabilities over the next twelve months. TPX’s debt-to-equity ratio is 20.82 versus a D/E of 0.00 for FBHS. TPX is therefore the more solvent of the two companies, and has lower financial risk.
TPX trades at a forward P/E of 14.86, a P/B of 35.94, and a P/S of 1.05, compared to a forward P/E of 19.88, a P/B of 4.13, and a P/S of 2.02 for FBHS. 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 isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. TPX is currently priced at a -10.42% to its one-year price target of 64.88. Comparatively, FBHS is -3.97% relative to its price target of 70.97. This suggests that TPX 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 2.50 for TPX and 2.30 for FBHS, which implies that analysts are more bullish on the outlook for TPX.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. TPX has a beta of 1.56 and FBHS’s beta is 1.41. FBHS’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. TPX has a short ratio of 9.39 compared to a short interest of 4.75 for FBHS. This implies that the market is currently less bearish on the outlook for FBHS.
Fortune Brands Home & Security, Inc. (NYSE:FBHS) beats Tempur Sealy International, Inc. (NYSE:TPX) on a total of 7 of the 14 factors compared between the two stocks. FBHS is growing fastly, higher liquidity and has lower financial risk. Finally, FBHS has better sentiment signals based on short interest.