Houghton Mifflin Harcourt (NASDAQ: HMHC) and Chegg (NYSE:CHGG) are both small-cap business services companies, but which is the better investment? We will contrast the two businesses based on the strength of their earnings, profitabiliy, dividends, risk, valuation, analyst recommendations and institutional ownership.

Insider and Institutional Ownership

79.7% of Chegg shares are held by institutional investors. 1.3% of Houghton Mifflin Harcourt shares are held by company insiders. Comparatively, 20.4% of Chegg shares are held by company insiders. Strong institutional ownership is an indication that hedge funds, endowments and large money managers believe a stock will outperform the market over the long term.

Profitability

This table compares Houghton Mifflin Harcourt and Chegg’s net margins, return on equity and return on assets.

Net Margins Return on Equity Return on Assets
Houghton Mifflin Harcourt -17.29% -12.53% -4.08%
Chegg -11.83% -8.14% -5.97%

Risk & Volatility

Houghton Mifflin Harcourt has a beta of 0.6, indicating that its share price is 40% less volatile than the S&P 500. Comparatively, Chegg has a beta of 1.83, indicating that its share price is 83% more volatile than the S&P 500.

Analyst Ratings

This is a summary of recent ratings and price targets for Houghton Mifflin Harcourt and Chegg, as provided by MarketBeat.

Sell Ratings Hold Ratings Buy Ratings Strong Buy Ratings Rating Score
Houghton Mifflin Harcourt 0 2 1 1 2.75
Chegg 0 1 8 0 2.89

Houghton Mifflin Harcourt presently has a consensus target price of $17.88, suggesting a potential upside of 58.89%. Chegg has a consensus target price of $13.61, suggesting a potential downside of 11.04%. Given Houghton Mifflin Harcourt’s higher possible upside, equities analysts clearly believe Houghton Mifflin Harcourt is more favorable than Chegg.

Valuation and Earnings

This table compares Houghton Mifflin Harcourt and Chegg’s gross revenue, earnings per share (EPS) and valuation.

Gross Revenue Price/Sales Ratio EBITDA Earnings Per Share Price/Earnings Ratio
Houghton Mifflin Harcourt $1.39 billion 1.00 $45.54 million ($1.96) -5.74
Chegg $253.32 million 5.78 -$7.45 million ($0.32) -47.81

Houghton Mifflin Harcourt has higher revenue and earnings than Chegg. Chegg is trading at a lower price-to-earnings ratio than Houghton Mifflin Harcourt, indicating that it is currently the more affordable of the two stocks.

Summary

Chegg beats Houghton Mifflin Harcourt on 9 of the 14 factors compared between the two stocks.

Houghton Mifflin Harcourt Company Profile

Houghton Mifflin Harcourt Company (HMH) is a global learning company, specializing in education solutions across a range of media. The Company operates through two segments: Education and Trade Publishing. As of December 31, 2016, the Company delivered content, services and technology to both educational institutions and consumers, reaching over 50 million students in approximately 150 countries across the world. It sells its products and services across multiple media and distribution channels. Its Education segment provides educational content, services and technology solutions to meet the diverse needs of classrooms. Its Trade Publishing segment develops, markets and sells consumer books in print and digital formats, and licenses book rights to other publishers and electronic businesses in the United States and abroad.

Chegg Company Profile

Chegg, Inc. is a student-first connected learning platform. The Company helps students study for college admission exams, find the colleges, get grades and test scores while in school, and find internships that allow them to gain skills to help them enter the workforce after college. The Company matches domestic and international students with colleges, universities and other academic institutions (collectively referred to as colleges) in the United States. It also offers eTextbooks library for rent and sale. The Company also has live tutors on its connected learning platform available to students online, anytime, anywhere through its Chegg Tutors service. It provides access to internships to help students gain skills that are critical to securing their first job. It offers two product lines: Required Materials and Chegg Services. The Required Materials product line includes the rental and sale of print textbooks and eTextbooks, as well as the commission it receives from Ingram.

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