EQT Corporation (NYSE:EQT) and Sanchez Energy Corporation (NYSE:SN) are the two most active stocks in the Independent Oil & Gas 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.
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 EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. EQT Corporation (EQT) has an EBITDA margin of 14.81%, compared to an EBITDA margin of 30.85% for Sanchez Energy Corporation (SN). This suggests that SN underlying business is more profitable. EQT’s ROI is -0.20% while SN has a ROI of -19.00%. The interpretation is that EQT’s business generates a higher return on investment than SN’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. EQT’s free cash flow (“FCF”) per share for the trailing twelve months was -1.28. Comparatively, SN’s free cash flow per share was -0.79. On a percent-of-sales basis, EQT’s free cash flow was -13.79% while SN converted -0.02% of its revenues into cash flow. This means that, for a given level of sales, SN 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. EQT has a current ratio of 0.70 compared to 1.00 for SN. This means that SN can more easily cover its most immediate liabilities over the next twelve months.
EQT trades at a forward P/E of 41.93, a P/B of 1.86, and a P/S of 4.56, compared to a forward P/E of 6.01, and a P/S of 0.74 for SN. 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. EQT is currently priced at a -13.99% to its one-year price target of $75.42. Comparatively, SN is -40.68% relative to its price target of $7.67. This suggests that SN 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 EQT and 2.50 for SN, which implies that analysts are more bullish on the outlook for SN.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. EQT has a beta of 0.77 and SN’s beta is 1.69. EQT’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. EQT has a short ratio of 7.60 compared to a short interest of 8.37 for SN. This implies that the market is currently less bearish on the outlook for EQT.
Sanchez Energy Corporation (NYSE:SN) beats EQT Corporation (NYSE:EQT) on a total of 7 of the 11 factors compared between the two stocks. SN generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, SN is the cheaper of the two stocks on an earnings and sales basis, SN is more undervalued relative to its price target. Finally, INOV has better sentiment signals based on short interest.