Finance

A Side-by-side Analysis of Vale S.A. (VALE) and Campbell Soup Company (CPB)

Vale S.A. (NYSE:VALE) shares are up more than 24.28% this year and recently decreased -0.66% or -$0.1 to settle at $15.03. Campbell Soup Company (NYSE:CPB), on the other hand, is down -18.48% year to date as of 05/17/2018. It currently trades at $39.22 and has returned -4.78% during the past week.

Vale S.A. (NYSE:VALE) and Campbell Soup Company (NYSE:CPB) are the two most active stocks in the Industrial Metals & Minerals industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect VALE to grow earnings at a 8.38% annual rate over the next 5 years. Comparatively, CPB is expected to grow at a 6.03% annual rate. All else equal, VALE’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. EBITDA margin of 21.91% for Campbell Soup Company (CPB). VALE’s ROI is 13.70% while CPB has a ROI of 19.20%. The interpretation is that CPB’s business generates a higher return on investment than VALE’s.

Cash Flow



Earnings don’t always accurately reflect the amount of cash that a company brings in. VALE’s free cash flow (“FCF”) per share for the trailing twelve months was -0.11. Comparatively, CPB’s free cash flow per share was +0.97. On a percent-of-sales basis, VALE’s free cash flow was -1.69% while CPB converted 3.7% of its revenues into cash flow. This means that, for a given level of sales, CPB 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. VALE has a current ratio of 1.50 compared to 0.60 for CPB. This means that VALE can more easily cover its most immediate liabilities over the next twelve months. VALE’s debt-to-equity ratio is 0.45 versus a D/E of 2.01 for CPB. CPB is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

VALE trades at a forward P/E of 10.30, a P/B of 1.87, and a P/S of 2.46, compared to a forward P/E of 11.99, a P/B of 6.08, and a P/S of 1.53 for CPB. 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. VALE is currently priced at a 4.01% to its one-year price target of 14.45. Comparatively, CPB is -13.99% relative to its price target of 45.60. This suggests that CPB is the better investment over the next year.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. VALE has a beta of 1.65 and CPB’s beta is 0.34. CPB’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. VALE has a short ratio of 4.23 compared to a short interest of 8.18 for CPB. This implies that the market is currently less bearish on the outlook for VALE.

Summary

Campbell Soup Company (NYSE:CPB) beats Vale S.A. (NYSE:VALE) on a total of 7 of the 14 factors compared between the two stocks. CPB is growing fastly, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. CPB is more undervalued relative to its price target. Finally, AAPL has better sentiment signals based on short interest.

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