Finance

Choosing Between NetApp, Inc. (NTAP) and Express Scripts Holding Company (ESRX)

NetApp, Inc. (NASDAQ:NTAP) shares are up more than 36.73% this year and recently decreased -5.13% or -$4.09 to settle at $75.64. Express Scripts Holding Company (NASDAQ:ESRX), on the other hand, is up 27.10% year to date as of 10/10/2018. It currently trades at $94.87 and has returned -0.49% during the past week.

NetApp, Inc. (NASDAQ:NTAP) and Express Scripts Holding Company (NASDAQ:ESRX) are the two most active stocks in the Data Storage Devices industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

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 NTAP to grow earnings at a 15.95% annual rate over the next 5 years. Comparatively, ESRX is expected to grow at a 10.44% annual rate. All else equal, NTAP’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 6.64% for Express Scripts Holding Company (ESRX). NTAP’s ROI is 21.30% while ESRX has a ROI of 19.00%. The interpretation is that NTAP’s business generates a higher return on investment than ESRX’s.

Cash Flow



The amount of free cash flow available to investors is ultimately what determines the value of a stock. NTAP’s free cash flow (“FCF”) per share for the trailing twelve months was +0.58. Comparatively, ESRX’s free cash flow per share was +1.14. On a percent-of-sales basis, NTAP’s free cash flow was 2.54% while ESRX converted 0.64% of its revenues into cash flow. This means that, for a given level of sales, NTAP is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. NTAP has a current ratio of 2.10 compared to 0.70 for ESRX. This means that NTAP can more easily cover its most immediate liabilities over the next twelve months. NTAP’s debt-to-equity ratio is 0.91 versus a D/E of 0.77 for ESRX. NTAP is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

NTAP trades at a forward P/E of 15.51, a P/B of 10.31, and a P/S of 3.30, compared to a forward P/E of 9.94, a P/B of 2.75, and a P/S of 0.53 for ESRX. NTAP is the expensive 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. NTAP is currently priced at a -12.55% to its one-year price target of 86.50. Comparatively, ESRX is 5.91% relative to its price target of 89.58. This suggests that NTAP 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. NTAP has a beta of 1.39 and ESRX’s beta is 1.04. ESRX’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. NTAP has a short ratio of 4.36 compared to a short interest of 3.14 for ESRX. This implies that the market is currently less bearish on the outlook for ESRX.

Summary

Express Scripts Holding Company (NASDAQ:ESRX) beats NetApp, Inc. (NASDAQ:NTAP) on a total of 7 of the 14 factors compared between the two stocks. ESRX is growing fastly and has lower financial risk. In terms of valuation, ESRX is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, ESRX has better sentiment signals based on short interest.

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