I’m looking for some clarity on this particular issue. Will be grateful if someone can put their opinions.
Let’s say there are 2 companies: A and B. Both have done considerable capex. Both are in the same industry and the industry is seeing tailwinds. Both company’s ROEs are currently dented due to capex.
Company A characteristics:
Company A is facing a turnaround situation. Has lost the past few years of growth due to a lack of proper future vision. Has a relatively low ROE. Management is guiding for higher EBITDA margins and there are signs that the efforts of the management are fruitful (rising ROE). Is trading at relatively lower valuations (18-25 TTM PE). Can be a candidate for rerating.
Company B characteristics:
Company B is relatively more stable. Higher ROE. Has seen a few past years of high growth. Can expect above-average growth to continue with prevailing EBITDA margins. Trading at 30-35 TTM PE.
Company A is an improving business + capex play whereas Company B is a consistent business + capex play. Considering these factors which one should be a more favourable bet/investment?
Looking for guidance, and perspectives.
Thanks.
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