Western Digital Corporation (NASDAQ:WDC) shares are up more than 8.71% this year and recently increased 1.83% or $1.55 to settle at $86.46. Union Pacific Corporation (NYSE:UNP), on the other hand, is down -2.89% year to date as of 02/20/2018. It currently trades at $130.23 and has returned 1.24% during the past week.
Western Digital Corporation (NASDAQ:WDC) and Union Pacific Corporation (NYSE:UNP) are the two most active stocks in the market 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 WDC to grow earnings at a 31.10% annual rate over the next 5 years. Comparatively, UNP is expected to grow at a 18.48% annual rate. All else equal, WDC’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 50.96% for Union Pacific Corporation (UNP). WDC’s ROI is 6.40% while UNP has a ROI of 12.60%. The interpretation is that UNP’s business generates a higher return on investment than WDC’s.
Cash is king when it comes to investing. WDC’s free cash flow (“FCF”) per share for the trailing twelve months was +2.63. Comparatively, UNP’s free cash flow per share was +0.57. On a percent-of-sales basis, WDC’s free cash flow was 4.1% while UNP converted 2.11% of its revenues into cash flow. This means that, for a given level of sales, WDC is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. WDC has a current ratio of 2.60 compared to 1.00 for UNP. This means that WDC can more easily cover its most immediate liabilities over the next twelve months. WDC’s debt-to-equity ratio is 1.07 versus a D/E of 0.68 for UNP. WDC is therefore the more solvent of the two companies, and has lower financial risk.
WDC trades at a forward P/E of 6.96, a P/B of 2.27, and a P/S of 1.28, compared to a forward P/E of 15.48, a P/B of 4.10, and a P/S of 4.76 for UNP. WDC 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 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. WDC is currently priced at a -23.88% to its one-year price target of 113.58. Comparatively, UNP is -10.99% relative to its price target of 146.31. This suggests that WDC 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 2.10 for WDC and 2.30 for UNP, which implies that analysts are more bullish on the outlook for UNP.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. WDC has a beta of 1.16 and UNP’s beta is 0.81. UNP’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. WDC has a short ratio of 2.21 compared to a short interest of 2.29 for UNP. This implies that the market is currently less bearish on the outlook for WDC.
Western Digital Corporation (NASDAQ:WDC) beats Union Pacific Corporation (NYSE:UNP) on a total of 10 of the 14 factors compared between the two stocks. WDC is growing fastly, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, WDC is the cheaper of the two stocks on an earnings, book value and sales basis, WDC is more undervalued relative to its price target. Finally, WDC has better sentiment signals based on short interest.