Finance

Infosys Limited (INFY) vs. Verizon Communications Inc. (VZ): Breaking Down the Two Hottest Stocks

Infosys Limited (NYSE:INFY) shares are up more than 20.10% this year and recently decreased -2.79% or -$0.28 to settle at $9.74. Verizon Communications Inc. (NYSE:VZ), on the other hand, is up 2.65% year to date as of 10/10/2018. It currently trades at $54.33 and has returned 0.07% during the past week.

Infosys Limited (NYSE:INFY) and Verizon Communications Inc. (NYSE:VZ) are the two most active stocks in the Information Technology Services 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

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect INFY to grow earnings at a 9.00% annual rate over the next 5 years. Comparatively, VZ is expected to grow at a 5.99% annual rate. All else equal, INFY’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 32.58% for Verizon Communications Inc. (VZ). INFY’s ROI is 19.60% while VZ has a ROI of 11.60%. The interpretation is that INFY’s business generates a higher return on investment than VZ’s.

Cash Flow



The amount of free cash flow available to investors is ultimately what determines the value of a stock. INFY’s free cash flow (“FCF”) per share for the trailing twelve months was -6.24. Comparatively, VZ’s free cash flow per share was +0.98. On a percent-of-sales basis, INFY’s free cash flow was -247.62% while VZ converted 3.21% of its revenues into cash flow. This means that, for a given level of sales, VZ 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. INFY has a current ratio of 2.90 compared to 1.00 for VZ. This means that INFY can more easily cover its most immediate liabilities over the next twelve months. INFY’s debt-to-equity ratio is 0.00 versus a D/E of 2.20 for VZ. VZ is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

INFY trades at a forward P/E of 17.24, a P/B of 5.13, and a P/S of 4.07, compared to a forward P/E of 11.45, a P/B of 4.32, and a P/S of 1.73 for VZ. INFY 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. INFY is currently priced at a 7.15% to its one-year price target of 9.09. Comparatively, VZ is -3.98% relative to its price target of 56.58. This suggests that VZ 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. INFY has a beta of 0.36 and VZ’s beta is 0.65. INFY’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. INFY has a short ratio of 13.07 compared to a short interest of 3.15 for VZ. This implies that the market is currently less bearish on the outlook for VZ.

Summary

Verizon Communications Inc. (NYSE:VZ) beats Infosys Limited (NYSE:INFY) on a total of 9 of the 14 factors compared between the two stocks. VZ is growing fastly, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, VZ is the cheaper of the two stocks on an earnings, book value and sales basis, VZ is more undervalued relative to its price target. Finally, VZ has better sentiment signals based on short interest.

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