Norfolk Southern Corporation (NYSE:NSC) shares are up more than 18.43% this year and recently decreased -5.55% or -$10.09 to settle at $171.60. Spotify Technology S.A. (NYSE:SPOT), on the other hand, is up 0.32% year to date as of 10/10/2018. It currently trades at $149.48 and has returned -15.52% during the past week.
Norfolk Southern Corporation (NYSE:NSC) and Spotify Technology S.A. (NYSE:SPOT) are the two most active stocks in the Railroads 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 grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect NSC to grow earnings at a 16.80% annual rate over the next 5 years. Comparatively, SPOT is expected to grow at a 25.00% annual rate. All else equal, SPOT’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. Norfolk Southern Corporation (NSC) has an EBITDA margin of 44.84%. This suggests that NSC underlying business is more profitable NSC’s ROI is 9.60% while SPOT has a ROI of -32.00%. The interpretation is that NSC’s business generates a higher return on investment than SPOT’s.Cash Flow
The amount of free cash flow available to investors is ultimately what determines the value of a stock. On a percent-of-sales basis, NSC’s free cash flow was 3.32% while SPOT converted 0% of its revenues into cash flow. This means that, for a given level of sales, NSC 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. NSC has a current ratio of 0.80 compared to 0.90 for SPOT. This means that SPOT can more easily cover its most immediate liabilities over the next twelve months. NSC’s debt-to-equity ratio is 0.58 versus a D/E of 0.00 for SPOT. NSC is therefore the more solvent of the two companies, and has lower financial risk.Valuation
NSC trades at a forward P/E of 17.02, a P/B of 2.91, and a P/S of 4.40, compared to a P/B of 23.28, and a P/S of 5.16 for SPOT. 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. NSC is currently priced at a -6.33% to its one-year price target of 183.19. Comparatively, SPOT is -27.67% relative to its price target of 206.67. This suggests that SPOT is the better investment over the next year.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. NSC has a short ratio of 4.35 compared to a short interest of 1.96 for SPOT. This implies that the market is currently less bearish on the outlook for SPOT.Summary
Spotify Technology S.A. (NYSE:SPOT) beats Norfolk Southern Corporation (NYSE:NSC) on a total of 8 of the 14 factors compared between the two stocks. SPOT is more profitable, higher liquidity and has lower financial risk. SPOT is more undervalued relative to its price target. Finally, SPOT has better sentiment signals based on short interest.