Newfield Exploration Company (NYSE:NFX) and Apache Corporation (NYSE:APA) are the two most active stocks in the Independent Oil & Gas industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect NFX to grow earnings at a 23.50% annual rate over the next 5 years. Comparatively, APA is expected to grow at a -10.60% annual rate. All else equal, NFX’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. Newfield Exploration Company (NFX) has an EBITDA margin of 52.28%, compared to an EBITDA margin of 50.74% for Apache Corporation (APA). This suggests that NFX underlying business is more profitable. NFX’s ROI is -27.90% while APA has a ROI of -8.40%. The interpretation is that APA’s business generates a higher return on investment than NFX’s.
The value of a stock is simply the present value of its future free cash flows. NFX’s free cash flow (“FCF”) per share for the trailing twelve months was +0.15. Comparatively, APA’s free cash flow per share was -0.14. On a percent-of-sales basis, NFX’s free cash flow was 2.03% while APA converted -1% of its revenues into cash flow. This means that, for a given level of sales, NFX 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. NFX has a current ratio of 1.30 compared to 1.60 for APA. This means that APA can more easily cover its most immediate liabilities over the next twelve months. NFX’s debt-to-equity ratio is 2.01 versus a D/E of 1.23 for APA. NFX is therefore the more solvent of the two companies, and has lower financial risk.
NFX trades at a forward P/E of 13.57, a P/B of 4.91, and a P/S of 3.64, compared to a forward P/E of 110.67, a P/B of 2.55, and a P/S of 3.03 for APA. NFX is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S 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
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. NFX is currently priced at a -17.87% to its one-year price target of $36.26. Comparatively, APA is -3.04% relative to its price target of $47.71. This suggests that NFX 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 2.00 for NFX and 3.00 for APA, which implies that analysts are more bullish on the outlook for APA.
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. NFX has a beta of 1.52 and APA’s beta is 1.07. APA’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. NFX has a short ratio of 2.65 compared to a short interest of 7.03 for APA. This implies that the market is currently less bearish on the outlook for NFX.
Newfield Exploration Company (NYSE:NFX) beats Apache Corporation (NYSE:APA) on a total of 8 of the 14 factors compared between the two stocks. NFX is growing fastly, is more profitable, has higher cash flow per share and has a higher cash conversion rate. NFX is more undervalued relative to its price target. Finally, NFX has better sentiment signals based on short interest.