Earnings

A Side-by-side Analysis of Range Resources Corporation (RRC) and EOG Resources, Inc. (EOG)

Range Resources Corporation (NYSE:RRC) shares are down more than -44.79% this year and recently decreased -1.09% or -$0.21 to settle at $18.97. EOG Resources, Inc. (NYSE:EOG), on the other hand, is up 4.94% year to date as of 11/06/2017. It currently trades at $106.09 and has returned 6.23% during the past week.

Range Resources Corporation (NYSE:RRC) and EOG Resources, Inc. (NYSE:EOG) 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.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect RRC to grow earnings at a 20.00% annual rate over the next 5 years.



Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 32.92% for EOG Resources, Inc. (EOG). RRC’s ROI is -0.90% while EOG has a ROI of -3.60%. The interpretation is that RRC’s business generates a higher return on investment than EOG’s.

Cash Flow 




Earnings don’t always accurately reflect the amount of cash that a company brings in. RRC’s free cash flow (“FCF”) per share for the trailing twelve months was -0.52. Comparatively, EOG’s free cash flow per share was -0.40. On a percent-of-sales basis, RRC’s free cash flow was -11.74% while EOG converted -3.02% of its revenues into cash flow. This means that, for a given level of sales, EOG 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. RRC has a current ratio of 0.50 compared to 1.30 for EOG. This means that EOG can more easily cover its most immediate liabilities over the next twelve months. RRC’s debt-to-equity ratio is 0.72 versus a D/E of 0.46 for EOG. RRC is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

RRC trades at a forward P/E of 29.01, a P/B of 0.84, and a P/S of 2.06, compared to a forward P/E of 64.65, a P/B of 4.38, and a P/S of 6.32 for EOG. RRC is the cheaper of the two stocks on an earnings, book value and sales basis. 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. RRC is currently priced at a -35.32% to its one-year price target of 29.33. Comparatively, EOG is 1.44% relative to its price target of 104.58. This suggests that RRC 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 2.10 for RRC and 2.10 for EOG, which implies that analysts are equally bullish on their outlook for the two stocks.

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. RRC has a beta of 0.93 and EOG’s beta is 0.98. RRC’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. RRC has a short ratio of 4.76 compared to a short interest of 3.56 for EOG. This implies that the market is currently less bearish on the outlook for EOG.

Summary

Range Resources Corporation (NYSE:RRC) beats EOG Resources, Inc. (NYSE:EOG) on a total of 8 of the 14 factors compared between the two stocks. RRC is growing fastly, is more profitable and generates a higher return on investment. In terms of valuation, RRC is the cheaper of the two stocks on an earnings, book value and sales basis, RRC is more undervalued relative to its price target. Finally, GPOR has better sentiment signals based on short interest.

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