Critical Comparison: Flex Ltd. (FLEX) vs. FirstEnergy Corp. (FE)

Flex Ltd. (NASDAQ:FLEX) shares are up more than 43.50% this year and recently increased 1.20% or $0.13 to settle at $10.92. FirstEnergy Corp. (NYSE:FE), on the other hand, is up 26.84% year to date as of 09/12/2019. It currently trades at $47.63 and has returned 2.39% during the past week.

Flex Ltd. (NASDAQ:FLEX) and FirstEnergy Corp. (NYSE:FE) are the two most active stocks in the Printed Circuit Boards industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect FLEX to grow earnings at a 17.35% annual rate over the next 5 years. Comparatively, FE is expected to grow at a -6.60% annual rate. All else equal, FLEX’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. , compared to an EBITDA margin of 17.23% for FirstEnergy Corp. (FE). FLEX’s ROI is 4.60% while FE has a ROI of 7.20%. The interpretation is that FE’s business generates a higher return on investment than FLEX’s.

Cash Flow

The amount of free cash flow available to investors is ultimately what determines the value of a stock. FLEX’s free cash flow (“FCF”) per share for the trailing twelve months was -1.58. Comparatively, FE’s free cash flow per share was -0.14. On a percent-of-sales basis, FLEX’s free cash flow was -3.1% while FE converted -0.67% of its revenues into cash flow. This means that, for a given level of sales, FE is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. FLEX has a current ratio of 1.30 compared to 0.60 for FE. This means that FLEX can more easily cover its most immediate liabilities over the next twelve months. FLEX’s debt-to-equity ratio is 1.08 versus a D/E of 2.85 for FE. FE is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

FLEX trades at a forward P/E of 7.84, a P/B of 1.87, and a P/S of 0.22, compared to a forward P/E of 19.20, a P/B of 3.50, and a P/S of 2.27 for FE. FLEX 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. FLEX is currently priced at a -19.94% to its one-year price target of 13.64. Comparatively, FE is -0.08% relative to its price target of 47.67. This suggests that FLEX is the better investment over the next year.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. FLEX has a beta of 1.83 and FE’s beta is 0.21. FE’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. FLEX has a short ratio of 1.92 compared to a short interest of 4.89 for FE. This implies that the market is currently less bearish on the outlook for FLEX.

Summary

Flex Ltd. (NASDAQ:FLEX) beats FirstEnergy Corp. (NYSE:FE) on a total of 8 of the 14 factors compared between the two stocks. FLEX is growing fastly, higher liquidity and has lower financial risk. In terms of valuation, FLEX is the cheaper of the two stocks on an earnings, book value and sales basis, FLEX is more undervalued relative to its price target. Finally, FLEX has better sentiment signals based on short interest.