Critical Comparison: Alcoa Corporation (AA) vs. New Residential Investment Corp. (NRZ)

Alcoa Corporation (NYSE:AA) shares are down more than -15.12% this year and recently increased 1.71% or $0.38 to settle at $22.56. New Residential Investment Corp. (NYSE:NRZ), on the other hand, is up 5.42% year to date as of 09/12/2019. It currently trades at $14.98 and has returned 4.68% during the past week.

Alcoa Corporation (NYSE:AA) and New Residential Investment Corp. (NYSE:NRZ) are the two most active stocks in the Aluminum 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.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Comparatively, NRZ is expected to grow at a -1.14% annual rate. All else equal, AA’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 94.5% for New Residential Investment Corp. (NRZ). AA’s ROI is 14.20% while NRZ has a ROI of 3.50%. The interpretation is that AA’s business generates a higher return on investment than NRZ’s.

Cash Flow

Earnings don’t always accurately reflect the amount of cash that a company brings in. AA’s free cash flow (“FCF”) per share for the trailing twelve months was +0.02. Comparatively, NRZ’s free cash flow per share was -6.48. On a percent-of-sales basis, AA’s free cash flow was 0.03% while NRZ converted -122.73% of its revenues into cash flow. This means that, for a given level of sales, AA is able to generate more free cash flow for investors.

Liquidity and Financial Risk

AA’s debt-to-equity ratio is 0.37 versus a D/E of 4.28 for NRZ. NRZ is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

AA trades at a forward P/E of 16.16, a P/B of 0.86, and a P/S of 0.35, compared to a forward P/E of 6.70, a P/B of 0.93, and a P/S of 3.22 for NRZ. 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. AA is currently priced at a -21.06% to its one-year price target of 28.58. Comparatively, NRZ is -17.92% relative to its price target of 18.25. This suggests that AA is the better investment over the next year.

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. AA has a short ratio of 2.71 compared to a short interest of 4.55 for NRZ. This implies that the market is currently less bearish on the outlook for AA.

Summary

Alcoa Corporation (NYSE:AA) beats New Residential Investment Corp. (NYSE:NRZ) on a total of 11 of the 14 factors compared between the two stocks. AA is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, AA is the cheaper of the two stocks on book value and sales basis, AA is more undervalued relative to its price target. Finally, AA has better sentiment signals based on short interest.