PVH Corp. (NYSE:PVH) shares are up more than 10.41% this year and recently increased 2.36% or $3.49 to settle at $151.49. Kennametal Inc. (NYSE:KMT), on the other hand, is down -23.36% year to date as of 07/17/2018. It currently trades at $37.10 and has returned 0.30% during the past week.
PVH Corp. (NYSE:PVH) and Kennametal Inc. (NYSE:KMT) are the two most active stocks in the Textile – Apparel Clothing industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.Growth
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect PVH to grow earnings at a 12.27% annual rate over the next 5 years. Comparatively, KMT is expected to grow at a 29.80% annual rate. All else equal, KMT’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 15.57% for Kennametal Inc. (KMT). PVH’s ROI is 5.60% while KMT has a ROI of 4.80%. The interpretation is that PVH’s business generates a higher return on investment than KMT’s.Cash Flow
Earnings don’t always accurately reflect the amount of cash that a company brings in. PVH’s free cash flow (“FCF”) per share for the trailing twelve months was -2.66. Comparatively, KMT’s free cash flow per share was +0.65. On a percent-of-sales basis, PVH’s free cash flow was -2.3% while KMT converted 2.58% of its revenues into cash flow. This means that, for a given level of sales, KMT 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. PVH has a current ratio of 1.80 compared to 2.60 for KMT. This means that KMT can more easily cover its most immediate liabilities over the next twelve months. PVH’s debt-to-equity ratio is 0.59 versus a D/E of 0.59 for KMT. PVH is therefore the more solvent of the two companies, and has lower financial risk.Valuation
PVH trades at a forward P/E of 14.65, a P/B of 2.10, and a P/S of 1.26, compared to a forward P/E of 12.12, a P/B of 2.56, and a P/S of 1.33 for KMT. 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. PVH is currently priced at a -12.8% to its one-year price target of 173.72. Comparatively, KMT is -19% relative to its price target of 45.80. This suggests that KMT is the better investment over the next year.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. PVH has a beta of 0.74 and KMT’s beta is 1.95. PVH’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. PVH has a short ratio of 2.01 compared to a short interest of 7.11 for KMT. This implies that the market is currently less bearish on the outlook for PVH.Summary
Kennametal Inc. (NYSE:KMT) beats PVH Corp. (NYSE:PVH) on a total of 8 of the 14 factors compared between the two stocks. KMT generates a higher return on investment, is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. KMT is more undervalued relative to its price target. Finally, SYNT has better sentiment signals based on short interest.