American International Group, Inc. (NYSE:AIG) shares are down more than -12.07% this year and recently decreased -2.66% or -$1.43 to settle at $52.39. Baidu, Inc. (NASDAQ:BIDU), on the other hand, is down -17.06% year to date as of 10/10/2018. It currently trades at $194.26 and has returned -10.21% during the past week.
American International Group, Inc. (NYSE:AIG) and Baidu, Inc. (NASDAQ:BIDU) are the two most active stocks in the Property & Casualty Insurance 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
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect AIG to grow earnings at a 34.55% annual rate over the next 5 years. Comparatively, BIDU is expected to grow at a 2.75% annual rate. All else equal, AIG’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 40.85% for Baidu, Inc. (BIDU). AIG’s ROI is 1.90% while BIDU has a ROI of 6.40%. The interpretation is that BIDU’s business generates a higher return on investment than AIG’s.Cash Flow
Earnings don’t always accurately reflect the amount of cash that a company brings in. AIG’s free cash flow (“FCF”) per share for the trailing twelve months was +0.34. Comparatively, BIDU’s free cash flow per share was -0.68. On a percent-of-sales basis, AIG’s free cash flow was 0.61% while BIDU converted -1.81% of its revenues into cash flow. This means that, for a given level of sales, AIG is able to generate more free cash flow for investors.Liquidity and Financial Risk
AIG’s debt-to-equity ratio is 0.55 versus a D/E of 0.36 for BIDU. AIG is therefore the more solvent of the two companies, and has lower financial risk.
AIG trades at a forward P/E of 9.67, a P/B of 0.77, and a P/S of 0.98, compared to a forward P/E of 16.47, a P/B of 3.13, and a P/S of 5.08 for BIDU. AIG 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
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. AIG is currently priced at a -15.6% to its one-year price target of 62.07. Comparatively, BIDU is -34.28% relative to its price target of 295.58. This suggests that BIDU 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. AIG has a beta of 1.27 and BIDU’s beta is 1.55. AIG’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. AIG has a short ratio of 4.91 compared to a short interest of 1.29 for BIDU. This implies that the market is currently less bearish on the outlook for BIDU.Summary
Baidu, Inc. (NASDAQ:BIDU) beats American International Group, Inc. (NYSE:AIG) on a total of 7 of the 14 factors compared between the two stocks. BIDU is growing fastly, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, AIG is the cheaper of the two stocks on an earnings, book value and sales basis, BIDU is more undervalued relative to its price target. Finally, BIDU has better sentiment signals based on short interest.