Global

Comparing Aflac Incorporated (AFL) and International Business Machines Corporation (IBM)

Aflac Incorporated (NYSE:AFL) shares are up more than 5.56% this year and recently decreased -2.28% or -$1.08 to settle at $46.33. International Business Machines Corporation (NYSE:IBM), on the other hand, is down -6.99% year to date as of 10/10/2018. It currently trades at $142.69 and has returned -6.87% during the past week.

Aflac Incorporated (NYSE:AFL) and International Business Machines Corporation (NYSE:IBM) are the two most active stocks in the Accident & Health Insurance 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

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 AFL to grow earnings at a 8.00% annual rate over the next 5 years. Comparatively, IBM is expected to grow at a 0.96% annual rate. All else equal, AFL’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 20.64% for International Business Machines Corporation (IBM). AFL’s ROI is 9.70% while IBM has a ROI of 17.40%. The interpretation is that IBM’s business generates a higher return on investment than AFL’s.

Cash Flow



The amount of free cash flow available to investors is ultimately what determines the value of a stock. AFL’s free cash flow (“FCF”) per share for the trailing twelve months was +1.76. Comparatively, IBM’s free cash flow per share was -0.08. On a percent-of-sales basis, AFL’s free cash flow was 6.24% while IBM converted -0.09% of its revenues into cash flow. This means that, for a given level of sales, AFL is able to generate more free cash flow for investors.

Liquidity and Financial Risk

AFL’s debt-to-equity ratio is 0.22 versus a D/E of 2.46 for IBM. IBM is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

AFL trades at a forward P/E of 11.12, a P/B of 1.50, and a P/S of 1.62, compared to a forward P/E of 10.18, a P/B of 7.05, and a P/S of 1.64 for IBM. 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. AFL is currently priced at a -2.46% to its one-year price target of 47.50. Comparatively, IBM is -12.35% relative to its price target of 162.80. This suggests that IBM 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. AFL has a beta of 0.90 and IBM’s beta is 0.90. IBM’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. AFL has a short ratio of 4.12 compared to a short interest of 3.76 for IBM. This implies that the market is currently less bearish on the outlook for IBM.

Summary




Aflac Incorporated (NYSE:AFL) beats International Business Machines Corporation (NYSE:IBM) on a total of 7 of the 14 factors compared between the two stocks. AFL is growing fastly, is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, AFL is the cheaper of the two stocks on book value and sales basis, Finally, BP has better sentiment signals based on short interest.

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