The Procter & Gamble Company (NYSE:PG) shares are down more than -1.34% this year and recently decreased -1.34% or -$1.23 to settle at $90.65. Avon Products, Inc. (NYSE:AVP), on the other hand, is up 1.40% year to date as of 01/02/2018. It currently trades at $2.18 and has returned -4.80% during the past week.
The Procter & Gamble Company (NYSE:PG) and Avon Products, Inc. (NYSE:AVP) are the two most active stocks in the Personal Products 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.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect PG to grow earnings at a 7.32% annual rate over the next 5 years.
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 5.75% for Avon Products, Inc. (AVP). PG’s ROI is 12.70% while AVP has a ROI of 19.00%. The interpretation is that AVP’s business generates a higher return on investment than PG’s.
Cash is king when it comes to investing. PG’s free cash flow (“FCF”) per share for the trailing twelve months was +0.25. Comparatively, AVP’s free cash flow per share was +0.00. On a percent-of-sales basis, PG’s free cash flow was 0.98% while AVP converted 0% of its revenues into cash flow. This means that, for a given level of sales, PG 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. PG has a current ratio of 0.90 compared to 1.40 for AVP. This means that AVP can more easily cover its most immediate liabilities over the next twelve months.
PG trades at a forward P/E of 20.33, a P/B of 4.30, and a P/S of 3.53, compared to a forward P/E of 11.60, and a P/S of 0.17 for AVP. PG 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 is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. PG is currently priced at a -3.08% to its one-year price target of 93.53. Comparatively, AVP is -14.17% relative to its price target of 2.54. This suggests that AVP 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 2.30 for PG and 2.90 for AVP, which implies that analysts are more bullish on the outlook for AVP.
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. PG has a beta of 0.67 and AVP’s beta is 1.85. PG’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. PG has a short ratio of 4.91 compared to a short interest of 3.92 for AVP. This implies that the market is currently less bearish on the outlook for AVP.
Avon Products, Inc. (NYSE:AVP) beats The Procter & Gamble Company (NYSE:PG) on a total of 8 of the 14 factors compared between the two stocks. AVP is growing fastly, higher liquidity and has lower financial risk. In terms of valuation, AVP is the cheaper of the two stocks on an earnings, book value and sales basis, AVP is more undervalued relative to its price target. Finally, AVP has better sentiment signals based on short interest.