Earnings

Which of these 2 stocks can turn out to be absolute gem? – MGM Resorts International (MGM), Kratos Defense & Security Solutions, Inc. (KTOS)

The shares of MGM Resorts International have increased by more than 3.02% this year alone. The shares recently went down by -1.52% or -$0.53 and now trades at $34.40. The shares of Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS), has jumped by 2.55% year to date as of 04/13/2018. The shares currently trade at $10.86 and have been able to report a change of 1.78% over the past one week.

The stock of MGM Resorts International and Kratos Defense & Security Solutions, Inc. were two of the most active stocks on Friday. Investors seem to be very interested in what happens to the stocks of these two companies but do investors favor one over the other? We will analyze the growth, profitability, risk, valuation, and insider trends of both companies and see which one investors prefer.

Next 5Y EPS Growth: -3.50% versus 13.00%

When a company is able to grow consistently in terms of earnings at a high compound rate have the highest likelihood of creating value for its shareholders over time. Analysts have predicted that MGM will grow it’s earning at a -3.50% annual rate in the next 5 years. This is in contrast to KTOS which will have a positive growth at a 13.00% annual rate. This means that the higher growth rate of KTOS implies a greater potential for capital appreciation over the years.

Profitability and Returns

Growth alone cannot be used to see if the company will be valuable. Shareholders will be the losers if a company invest in ventures that aren’t profitable enough to support upbeat growth. In order for us to accurately measure profitability and return, we will be using the EBITDA margin and Return on Investment (ROI), which balances the difference in capital structure. MGM has an EBITDA margin of 24.68%, this implies that the underlying business of MGM is more profitable. The ROI of MGM is 7.10% while that of KTOS is -6.80%. These figures suggest that MGM ventures generate a higher ROI than that of KTOS.

Cash Flow



The value of a stock is ultimately determined by the amount of cash flow that the investors have available. Over the last 12 months, MGM’s free cash flow per share is a positive 1.52.

Liquidity and Financial Risk

The ability of a company to meet up with its short-term obligations and be able to clear its longer-term debts is measured using Liquidity and leverage ratios. The current ratio for MGM is 0.80 and that of KTOS is 2.50. This implies that it is easier for MGM to cover its immediate obligations over the next 12 months than KTOS. The debt ratio of MGM is 1.70 compared to 0.58 for KTOS. MGM can be able to settle its long-term debts and thus is a lower financial risk than KTOS.

Valuation

MGM currently trades at a forward P/E of 18.04, a P/B of 2.56, and a P/S of 1.84 while KTOS trades at a forward P/E of 31.03, a P/B of 2.19, and a P/S of 1.53. This means that looking at the earnings, book values and sales basis, MGM is the cheaper one. It is very obvious that earnings are the most important factors to investors, thus analysts are most likely to place their bet on the P/E.

Analyst Price Targets and Opinions




The mistake some people make is that they think a cheap stock has more value to it. In order to know the value of a stock, there is need to compare its current price to its likely trading price in the future. The price of MGM is currently at a -14.75% to its one-year price target of 40.35. Looking at its rival pricing, KTOS is at a -20.03% relative to its price target of 13.58.

When looking at the investment recommendation on say a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell), MGM is given a 2.00 while 2.30 placed for KTOS. This means that analysts are more bullish on the outlook for KTOS stocks.

Insider Activity and Investor Sentiment

Short interest or otherwise called the percentage of a stock’s tradable shares currently being shorted is another data that investors use to get a handle on sentiment. The short ratio for MGM is 2.38 while that of KTOS is just 5.72. This means that analysts are more bullish on the forecast for MGM stock.

Conclusion

The stock of Kratos Defense & Security Solutions, Inc. defeats that of MGM Resorts International when the two are compared, with KTOS taking 6 out of the total factors that were been considered. KTOS happens to be more profitable, generates a higher ROI, has higher cash flow per share, higher liquidity and has a lower financial risk. When looking at the stock valuation, KTOS is the cheaper one on an earnings, book value and sales basis. Finally, the sentiment signal for KTOS is better on when it is viewed on short interest.

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