Telefonaktiebolaget LM Ericsson (publ) (NASDAQ:ERIC) shares are up more than 25.45% this year and recently decreased -3.79% or -$0.33 to settle at $8.38. Target Corporation (NYSE:TGT), on the other hand, is up 30.57% year to date as of 10/10/2018. It currently trades at $85.20 and has returned -0.90% during the past week.
Telefonaktiebolaget LM Ericsson (publ) (NASDAQ:ERIC) and Target Corporation (NYSE:TGT) are the two most active stocks in the Communication Equipment industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.Growth
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Comparatively, TGT is expected to grow at a 7.50% annual rate. All else equal, TGT’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. EBITDA margin of 9.1% for Target Corporation (TGT). ERIC’s ROI is -23.60% while TGT has a ROI of 13.20%. The interpretation is that TGT’s business generates a higher return on investment than ERIC’s.Cash Flow
Earnings don’t always accurately reflect the amount of cash that a company brings in. ERIC’s free cash flow (“FCF”) per share for the trailing twelve months was -0.85. Comparatively, TGT’s free cash flow per share was +1.58. On a percent-of-sales basis, ERIC’s free cash flow was -12.01% while TGT converted 1.16% of its revenues into cash flow. This means that, for a given level of sales, TGT 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. ERIC has a current ratio of 1.50 compared to 0.80 for TGT. This means that ERIC can more easily cover its most immediate liabilities over the next twelve months. ERIC’s debt-to-equity ratio is 0.36 versus a D/E of 1.00 for TGT. TGT is therefore the more solvent of the two companies, and has lower financial risk.Valuation
ERIC trades at a forward P/E of 24.57, a P/B of 2.69, and a P/S of 1.30, compared to a forward P/E of 15.13, a P/B of 4.06, and a P/S of 0.61 for TGT. ERIC is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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. ERIC is currently priced at a -4.01% to its one-year price target of 8.73. Comparatively, TGT is -4.28% relative to its price target of 89.01. This suggests that TGT 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. ERIC has a beta of 0.88 and TGT’s beta is 0.71. TGT’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. ERIC has a short ratio of 3.90 compared to a short interest of 5.72 for TGT. This implies that the market is currently less bearish on the outlook for ERIC.Summary
Target Corporation (NYSE:TGT) beats Telefonaktiebolaget LM Ericsson (publ) (NASDAQ:ERIC) on a total of 10 of the 14 factors compared between the two stocks. TGT higher liquidity, is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, TGT is the cheaper of the two stocks on an earnings and sales basis, TGT is more undervalued relative to its price target. Finally, LBTYK has better sentiment signals based on short interest.