AstraZeneca PLC (NYSE:AZN) shares are up more than 9.65% this year and recently decreased -0.60% or -$0.23 to settle at $38.05. Xilinx, Inc. (NASDAQ:XLNX), on the other hand, is up 10.47% year to date as of 10/10/2018. It currently trades at $74.48 and has returned -9.30% during the past week.
AstraZeneca PLC (NYSE:AZN) and Xilinx, Inc. (NASDAQ:XLNX) are the two most active stocks in the Drug Manufacturers – Major industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.Growth
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect AZN to grow earnings at a 12.50% annual rate over the next 5 years. Comparatively, XLNX is expected to grow at a 15.85% annual rate. All else equal, XLNX’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. 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 33.95% for Xilinx, Inc. (XLNX). AZN’s ROI is 13.30% while XLNX has a ROI of 18.20%. The interpretation is that XLNX’s business generates a higher return on investment than AZN’s.Cash Flow
The amount of free cash flow available to investors is ultimately what determines the value of a stock. AZN’s free cash flow (“FCF”) per share for the trailing twelve months was -0.09. Comparatively, XLNX’s free cash flow per share was +0.23. On a percent-of-sales basis, AZN’s free cash flow was -1.01% while XLNX converted 2.29% of its revenues into cash flow. This means that, for a given level of sales, XLNX is able to generate more free cash flow for investors.Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. AZN has a current ratio of 0.70 compared to 4.40 for XLNX. This means that XLNX can more easily cover its most immediate liabilities over the next twelve months. AZN’s debt-to-equity ratio is 1.56 versus a D/E of 0.74 for XLNX. AZN is therefore the more solvent of the two companies, and has lower financial risk.Valuation
AZN trades at a forward P/E of 20.24, a P/B of 7.63, and a P/S of 4.32, compared to a forward P/E of 22.65, a P/B of 8.11, and a P/S of 7.63 for XLNX. AZN 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 is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. AZN is currently priced at a -8.67% to its one-year price target of 41.66. Comparatively, XLNX is -9.49% relative to its price target of 82.29. This suggests that XLNX 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. AZN has a beta of 0.58 and XLNX’s beta is 1.04. AZN’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. AZN has a short ratio of 3.23 compared to a short interest of 2.21 for XLNX. This implies that the market is currently less bearish on the outlook for XLNX.Summary
Xilinx, Inc. (NASDAQ:XLNX) beats AstraZeneca PLC (NYSE:AZN) on a total of 9 of the 14 factors compared between the two stocks. XLNX , is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, AZN is the cheaper of the two stocks on an earnings, book value and sales basis, XLNX is more undervalued relative to its price target. Finally, XLNX has better sentiment signals based on short interest.