Choosing Between Microsoft Corporation (MSFT) and Omnicom Group Inc. (OMC)

Microsoft Corporation (NASDAQ:MSFT) shares are up more than 33.57% this year and recently increased 0.61% or $0.69 to settle at $114.26. Omnicom Group Inc. (NYSE:OMC), on the other hand, is down -2.65% year to date as of 09/21/2018. It currently trades at $70.90 and has returned 2.78% during the past week.

Microsoft Corporation (NASDAQ:MSFT) and Omnicom Group Inc. (NYSE:OMC) are the two most active stocks in the Business Software & Services 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

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 MSFT to grow earnings at a 12.42% annual rate over the next 5 years. Comparatively, OMC is expected to grow at a 7.03% annual rate. All else equal, MSFT’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 15.63% for Omnicom Group Inc. (OMC). MSFT’s ROI is 17.60% while OMC has a ROI of 19.50%. The interpretation is that OMC’s business generates a higher return on investment than MSFT’s.

Cash Flow

If there’s one thing investors care more about than earnings, it’s cash flow. MSFT’s free cash flow (“FCF”) per share for the trailing twelve months was +0.54. Comparatively, OMC’s free cash flow per share was -0.64. On a percent-of-sales basis, MSFT’s free cash flow was 3.77% while OMC converted -0.94% of its revenues into cash flow. This means that, for a given level of sales, MSFT 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. MSFT has a current ratio of 2.90 compared to 0.90 for OMC. This means that MSFT can more easily cover its most immediate liabilities over the next twelve months. MSFT’s debt-to-equity ratio is 0.97 versus a D/E of 2.11 for OMC. OMC is therefore the more solvent of the two companies, and has lower financial risk.

Valuation
MSFT trades at a forward P/E of 23.20, a P/B of 10.61, and a P/S of 7.89, compared to a forward P/E of 12.25, a P/B of 6.92, and a P/S of 1.05 for OMC. MSFT 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

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. MSFT is currently priced at a -6.21% to its one-year price target of 121.82. Comparatively, OMC is -3.93% relative to its price target of 73.80. This suggests that MSFT 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. MSFT has a beta of 1.27 and OMC’s beta is 1.08. OMC’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. MSFT has a short ratio of 1.75 compared to a short interest of 10.83 for OMC. This implies that the market is currently less bearish on the outlook for MSFT.

Summary

Microsoft Corporation (NASDAQ:MSFT) beats Omnicom Group Inc. (NYSE:OMC) on a total of 9 of the 14 factors compared between the two stocks. MSFT is growing fastly, is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. MSFT is more undervalued relative to its price target. Finally, MSFT has better sentiment signals based on short interest.

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