Thomson Reuters Corporation (NYSE:TRI), on the other hand, is up 37.18% year to date as of 08/06/2019. It currently trades at $66.27 and has returned -3.24% during the past week.
The Gap, Inc. (NYSE:GPS) and Thomson Reuters Corporation (NYSE:TRI) are the two most active stocks in the Apparel Stores industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect GPS to grow earnings at a 3.92% annual rate over the next 5 years. Comparatively, TRI is expected to grow at a 43.75% annual rate. All else equal, TRI’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 9.69% for Thomson Reuters Corporation (TRI). GPS’s ROI is 22.40% while TRI has a ROI of 5.20%. The interpretation is that GPS’s business generates a higher return on investment than TRI’s.
Cash is king when it comes to investing. GPS’s free cash flow (“FCF”) per share for the trailing twelve months was -1.50. Comparatively, TRI’s free cash flow per share was -. On a percent-of-sales basis, GPS’s free cash flow was -3.42% while TRI converted 0% of its revenues into cash flow. This means that, for a given level of sales, TRI is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. GPS has a current ratio of 1.50 compared to 1.80 for TRI. This means that TRI can more easily cover its most immediate liabilities over the next twelve months. GPS’s debt-to-equity ratio is 0.35 versus a D/E of 0.39 for TRI. TRI is therefore the more solvent of the two companies, and has lower financial risk.
GPS trades at a forward P/E of 8.30, a P/B of 1.89, and a P/S of 0.41, compared to a forward P/E of 34.04, a P/B of 3.75, and a P/S of 6.05 for TRI. GPS 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. GPS is currently priced at a -17.91% to its one-year price target of 21.72. Comparatively, TRI is 38.87% relative to its price target of 47.72. This suggests that GPS is the better investment over the next year.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. GPS has a beta of 0.66 and TRI’s beta is 0.55. TRI’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. GPS has a short ratio of 5.44 compared to a short interest of 6.71 for TRI. This implies that the market is currently less bearish on the outlook for GPS.
The Gap, Inc. (NYSE:GPS) beats Thomson Reuters Corporation (NYSE:TRI) on a total of 8 of the 14 factors compared between the two stocks. GPS is more profitable, generates a higher return on investment and has lower financial risk. In terms of valuation, GPS is the cheaper of the two stocks on an earnings, book value and sales basis, GPS is more undervalued relative to its price target. Finally, GPS has better sentiment signals based on short interest.