Finance

Dissecting the Numbers for Graphic Packaging Holding Company (GPK) and ServiceNow, Inc. (NOW)

Graphic Packaging Holding Company (NYSE:GPK) shares are up more than 2.07% this year and recently increased 2.27% or $0.35 to settle at $15.77. ServiceNow, Inc. (NYSE:NOW), on the other hand, is up 27.76% year to date as of 04/10/2018. It currently trades at $166.58 and has returned 2.97% during the past week.

Graphic Packaging Holding Company (NYSE:GPK) and ServiceNow, Inc. (NYSE:NOW) are the two most active stocks in the Packaging & Containers industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

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 GPK to grow earnings at a 21.54% annual rate over the next 5 years. Comparatively, NOW is expected to grow at a 51.90% annual rate. All else equal, NOW’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. 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 13.49% for ServiceNow, Inc. (NOW). GPK’s ROI is 7.10% while NOW has a ROI of 9.30%. The interpretation is that NOW’s business generates a higher return on investment than GPK’s.

Cash Flow



The value of a stock is simply the present value of its future free cash flows. GPK’s free cash flow (“FCF”) per share for the trailing twelve months was +0.40. Comparatively, NOW’s free cash flow per share was +0.86. On a percent-of-sales basis, GPK’s free cash flow was 2.81% while NOW converted 7.78% of its revenues into cash flow. This means that, for a given level of sales, NOW 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. GPK has a current ratio of 1.40 compared to 1.10 for NOW. This means that GPK can more easily cover its most immediate liabilities over the next twelve months. GPK’s debt-to-equity ratio is 1.76 versus a D/E of 2.01 for NOW. NOW is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

GPK trades at a forward P/E of 15.58, a P/B of 3.79, and a P/S of 1.13, compared to a forward P/E of 55.94, a P/B of 49.58, and a P/S of 15.32 for NOW. GPK 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

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. GPK is currently priced at a -12.29% to its one-year price target of 17.98. Comparatively, NOW is -3% relative to its price target of 171.74. This suggests that GPK is the better investment over the next year.

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. GPK has a beta of 1.17 and NOW’s beta is 1.08. NOW’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. GPK has a short ratio of 2.04 compared to a short interest of 4.78 for NOW. This implies that the market is currently less bearish on the outlook for GPK.

Summary

Graphic Packaging Holding Company (NYSE:GPK) beats ServiceNow, Inc. (NYSE:NOW) on a total of 8 of the 14 factors compared between the two stocks. GPK is more profitable, higher liquidity and has lower financial risk. In terms of valuation, GPK is the cheaper of the two stocks on an earnings, book value and sales basis, GPK is more undervalued relative to its price target. Finally, GPK has better sentiment signals based on short interest.

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