Wayfair Inc. (NYSE:W) shares are down more than -4.66% this year and recently decreased -3.07% or -$2.42 to settle at $76.53. Masco Corporation (NYSE:MAS), on the other hand, is down -6.49% year to date as of 03/19/2018. It currently trades at $41.09 and has returned -3.25% during the past week.
Wayfair Inc. (NYSE:W) and Masco Corporation (NYSE:MAS) 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.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect W to grow earnings at a 16.35% annual rate over the next 5 years. Comparatively, MAS is expected to grow at a 19.66% annual rate. All else equal, MAS’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. EBITDA margin of 16.88% for Masco Corporation (MAS). W’s ROI is -44.70% while MAS has a ROI of 27.50%. The interpretation is that MAS’s business generates a higher return on investment than W’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. W’s free cash flow (“FCF”) per share for the trailing twelve months was +0.02. Comparatively, MAS’s free cash flow per share was +0.61. On a percent-of-sales basis, W’s free cash flow was 0.04% while MAS converted 2.5% of its revenues into cash flow. This means that, for a given level of sales, MAS 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. W has a current ratio of 1.10 compared to 2.00 for MAS. This means that MAS can more easily cover its most immediate liabilities over the next twelve months.
W trades at a P/S of 1.53, compared to a forward P/E of 14.07, and a P/S of 1.69 for MAS. 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. W is currently priced at a -12.44% to its one-year price target of 87.40. Comparatively, MAS is -14.7% relative to its price target of 48.17. This suggests that MAS 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 2.20 for W and 2.20 for MAS, which implies that analysts are equally bullish on their outlook for the two stocks.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. W has a beta of 1.27 and MAS’s beta is 1.51. W’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. W has a short ratio of 6.17 compared to a short interest of 2.96 for MAS. This implies that the market is currently less bearish on the outlook for MAS.
Masco Corporation (NYSE:MAS) beats Wayfair Inc. (NYSE:W) on a total of 9 of the 13 factors compared between the two stocks. MAS , is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. MAS is more undervalued relative to its price target. Finally, MAS has better sentiment signals based on short interest.