Global

Comparing Activision Blizzard, Inc. (ATVI) and International Paper Company (IP)

Activision Blizzard, Inc. (NASDAQ:ATVI) shares are up more than 16.20% this year and recently decreased -5.23% or -$4.06 to settle at $73.58. International Paper Company (NYSE:IP), on the other hand, is down -24.87% year to date as of 10/10/2018. It currently trades at $43.53 and has returned -9.76% during the past week.

Activision Blizzard, Inc. (NASDAQ:ATVI) and International Paper Company (NYSE:IP) are the two most active stocks in the Multimedia & Graphics Software 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

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect ATVI to grow earnings at a 14.90% annual rate over the next 5 years. Comparatively, IP is expected to grow at a 14.99% annual rate. All else equal, IP’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 11.01% for International Paper Company (IP). ATVI’s ROI is 7.60% while IP has a ROI of 7.30%. The interpretation is that ATVI’s business generates a higher return on investment than IP’s.

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. ATVI’s free cash flow (“FCF”) per share for the trailing twelve months was -0.36. Comparatively, IP’s free cash flow per share was +0.40. On a percent-of-sales basis, ATVI’s free cash flow was -3.91% while IP converted 0.75% of its revenues into cash flow. This means that, for a given level of sales, IP 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. ATVI has a current ratio of 3.00 compared to 1.60 for IP. This means that ATVI can more easily cover its most immediate liabilities over the next twelve months. ATVI’s debt-to-equity ratio is 0.00 versus a D/E of 1.68 for IP. IP is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

ATVI trades at a forward P/E of 24.18, a P/B of 5.41, and a P/S of 7.79, compared to a forward P/E of 7.73, a P/B of 2.63, and a P/S of 0.78 for IP. ATVI 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. ATVI is currently priced at a -9.33% to its one-year price target of 81.15. Comparatively, IP is -31.65% relative to its price target of 63.69. This suggests that IP is the better investment over the next year.

Risk and Volatility

No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. ATVI has a beta of 0.92 and IP’s beta is 1.58. ATVI’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. ATVI has a short ratio of 3.54 compared to a short interest of 2.94 for IP. This implies that the market is currently less bearish on the outlook for IP.

Summary

International Paper Company (NYSE:IP) beats Activision Blizzard, Inc. (NASDAQ:ATVI) on a total of 8 of the 14 factors compared between the two stocks. IP is more profitable, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, IP is the cheaper of the two stocks on an earnings, book value and sales basis, IP is more undervalued relative to its price target. Finally, IP has better sentiment signals based on short interest.

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