Patterson-UTI Energy, Inc. (NASDAQ:PTEN) and Baker Hughes, a GE company (NYSE:BHGE) are the two most active stocks in the Oil & Gas Drilling & Exploration industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
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 PTEN to grow earnings at a 11.50% annual rate over the next 5 years. Comparatively, BHGE is expected to grow at a 45.90% annual rate. All else equal, BHGE’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 Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. PTEN’s ROI is -9.80% while BHGE has a ROI of -16.30%. The interpretation is that PTEN’s business generates a higher return on investment than BHGE’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. PTEN’s free cash flow (“FCF”) per share for the trailing twelve months was -0.56. Comparatively, BHGE’s free cash flow per share was -0.62. On a percent-of-sales basis, PTEN’s free cash flow was -0.01% while BHGE converted -2.7% of its revenues into cash flow. This means that, for a given level of sales, PTEN 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. PTEN has a current ratio of 1.20 compared to 3.70 for BHGE. This means that BHGE can more easily cover its most immediate liabilities over the next twelve months. PTEN’s debt-to-equity ratio is 0.00 versus a D/E of 0.24 for BHGE. BHGE is therefore the more solvent of the two companies, and has lower financial risk.
PTEN trades at a forward P/B of 0.88, and a P/S of 2.43, compared to a forward P/E of 21.56, a P/B of 1.16, and a P/S of 3.99 for BHGE. 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 is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. PTEN is currently priced at a -36.98% to its one-year price target of $25.15. Comparatively, BHGE is -33.72% relative to its price target of $50.18. This suggests that PTEN is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.20 for PTEN and 2.40 for BHGE, which implies that analysts are more bullish on the outlook for BHGE.
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. PTEN has a beta of 1.05 and BHGE’s beta is 0.88. BHGE’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. PTEN has a short ratio of 3.21 compared to a short interest of 2.55 for BHGE. This implies that the market is currently less bearish on the outlook for BHGE.
Patterson-UTI Energy, Inc. (NASDAQ:PTEN) beats Baker Hughes, a GE company (NYSE:BHGE) on a total of 8 of the 12 factors compared between the two stocks. PTEN generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, PTEN is the cheaper of the two stocks on book value and sales basis, PTEN is more undervalued relative to its price target. Finally, ATVI has better sentiment signals based on short interest.