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A Side-by-side Analysis of Flex Ltd. (FLEX) and Lexicon Pharmaceuticals, Inc. (LXRX)

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Flex Ltd. (NASDAQ:FLEX) shares are up more than 32.98% this year and recently decreased -0.49% or -$0.05 to settle at $10.12. Lexicon Pharmaceuticals, Inc. (NASDAQ:LXRX), on the other hand, is down -50.90% year to date as of 10/17/2019. It currently trades at $3.26 and has returned -3.26% during the past week.

Flex Ltd. (NASDAQ:FLEX) and Lexicon Pharmaceuticals, Inc. (NASDAQ:LXRX) are the two most active stocks in the Printed Circuit Boards industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

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.

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. Flex Ltd. (FLEX) has an EBITDA margin of 3.63%. This suggests that FLEX underlying business is more profitable FLEX’s ROI is 4.60% while LXRX has a ROI of -47.20%. The interpretation is that FLEX’s business generates a higher return on investment than LXRX’s.

Cash Flow

Cash is king when it comes to investing. FLEX’s free cash flow (“FCF”) per share for the trailing twelve months was -1.58. Comparatively, LXRX’s free cash flow per share was -0.25. On a percent-of-sales basis, FLEX’s free cash flow was -3.1% while LXRX converted -0.04% of its revenues into cash flow. This means that, for a given level of sales, LXRX is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. FLEX has a current ratio of 1.30 compared to 5.50 for LXRX. This means that LXRX can more easily cover its most immediate liabilities over the next twelve months.

Valuation

FLEX trades at a forward P/E of 7.26, a P/B of 1.73, and a P/S of 0.20, compared to a P/S of 8.21 for LXRX. FLEX is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. 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 -25.81% to its one-year price target of 13.64. Comparatively, LXRX is -59.25% relative to its price target of 8.00. This suggests that LXRX is the better investment over the next year.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. FLEX has a beta of 1.84 and LXRX’s beta is 0.87. LXRX’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. FLEX has a short ratio of 1.72 compared to a short interest of 3.79 for LXRX. This implies that the market is currently less bearish on the outlook for FLEX.

Summary

Lexicon Pharmaceuticals, Inc. (NASDAQ:LXRX) beats Flex Ltd. (NASDAQ:FLEX) on a total of 8 of the 14 factors compared between the two stocks. LXRX is growing fastly, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, LXRX is the cheaper of the two stocks on an earnings and book value, LXRX is more undervalued relative to its price target.

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