Five Below, Inc. (NASDAQ:FIVE), on the other hand, is up 1.01% year to date as of 01/26/2018. It currently trades at $66.99 and has returned -0.78% during the past week.
Office Depot, Inc. (NASDAQ:ODP) and Five Below, Inc. (NASDAQ:FIVE) are the two most active stocks in the Specialty Retail, Other 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.
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 ODP to grow earnings at a 5.21% annual rate over the next 5 years. Comparatively, FIVE is expected to grow at a 27.89% annual rate. All else equal, FIVE’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., compared to an EBITDA margin of 14.25% for Five Below, Inc. (FIVE). ODP’s ROI is 24.20% while FIVE has a ROI of 21.60%. The interpretation is that ODP’s business generates a higher return on investment than FIVE’s.
Cash is king when it comes to investing. ODP’s free cash flow (“FCF”) per share for the trailing twelve months was +0.38. Comparatively, FIVE’s free cash flow per share was -0.61. On a percent-of-sales basis, ODP’s free cash flow was 1.78% while FIVE converted -3.37% of its revenues into cash flow. This means that, for a given level of sales, ODP 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. ODP has a current ratio of 1.50 compared to 2.20 for FIVE. This means that FIVE can more easily cover its most immediate liabilities over the next twelve months. ODP’s debt-to-equity ratio is 0.52 versus a D/E of 0.00 for FIVE. ODP is therefore the more solvent of the two companies, and has lower financial risk.
ODP trades at a forward P/E of 6.92, a P/B of 0.87, and a P/S of 0.17, compared to a forward P/E of 28.76, a P/B of 9.69, and a P/S of 3.20 for FIVE. ODP 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 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. ODP is currently priced at a -19.29% to its one-year price target of 4.25. Comparatively, FIVE is -10.04% relative to its price target of 74.47. This suggests that ODP is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 3.00 for ODP and 2.10 for FIVE, which implies that analysts are more bullish on the outlook for ODP.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. ODP has a beta of 2.47 and FIVE’s beta is 0.69. FIVE’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. ODP has a short ratio of 3.92 compared to a short interest of 6.80 for FIVE. This implies that the market is currently less bearish on the outlook for ODP.
Office Depot, Inc. (NASDAQ:ODP) beats Five Below, Inc. (NASDAQ:FIVE) on a total of 8 of the 14 factors compared between the two stocks. ODP generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, ODP is the cheaper of the two stocks on an earnings, book value and sales basis, ODP is more undervalued relative to its price target. Finally, ODP has better sentiment signals based on short interest.