RSP Permian, Inc. (NYSE:RSPP) shares are down more than -16.76% this year and recently decreased -2.19% or -$0.83 to settle at $37.14. Antero Resources Corporation (NYSE:AR), on the other hand, is down -15.90% year to date as of 11/13/2017. It currently trades at $19.89 and has returned -1.00% during the past week.
RSP Permian, Inc. (NYSE:RSPP) and Antero Resources Corporation (NYSE:AR) are the two most active stocks in the Oil & Gas Drilling & Exploration industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
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 RSPP to grow earnings at a 30.00% annual rate over the next 5 years. Comparatively, AR is expected to grow at a 22.65% annual rate. All else equal, RSPP’s higher growth rate would imply a greater potential for capital appreciation.
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. RSP Permian, Inc. (RSPP) has an EBITDA margin of 67.87%. This suggests that RSPP underlying business is more profitable RSPP’s ROI is 1.10% while AR has a ROI of -4.50%. The interpretation is that RSPP’s business generates a higher return on investment than AR’s.
If there’s one thing investors care more about than earnings, it’s cash flow. RSPP’s free cash flow (“FCF”) per share for the trailing twelve months was -1.88. Comparatively, AR’s free cash flow per share was +1.66. On a percent-of-sales basis, RSPP’s free cash flow was -0.08% while AR converted 30.02% of its revenues into cash flow. This means that, for a given level of sales, AR is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. RSPP has a current ratio of 0.80 compared to 0.90 for AR. This means that AR can more easily cover its most immediate liabilities over the next twelve months. RSPP’s debt-to-equity ratio is 0.35 versus a D/E of 0.59 for AR. AR is therefore the more solvent of the two companies, and has lower financial risk.
RSPP trades at a forward P/E of 28.66, a P/B of 1.39, and a P/S of 8.57, compared to a forward P/E of 26.31, a P/B of 0.82, and a P/S of 2.28 for AR. RSPP is the expensive 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. RSPP is currently priced at a -18.09% to its one-year price target of 45.34. Comparatively, AR is -25.31% relative to its price target of 26.63. This suggests that AR 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 1.70 for RSPP and 2.20 for AR, which implies that analysts are more bullish on the outlook for AR.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. RSPP has a beta of 2.14 and AR’s beta is 0.97. AR’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.RSPP has a short ratio of 4.16 compared to a short interest of 9.58 for AR. This implies that the market is currently less bearish on the outlook for RSPP.
Antero Resources Corporation (NYSE:AR) beats RSP Permian, Inc. (NYSE:RSPP) on a total of 8 of the 14 factors compared between the two stocks. AR is growing fastly, has a higher cash conversion rate and higher liquidity. In terms of valuation, AR is the cheaper of the two stocks on an earnings, book value and sales basis, AR is more undervalued relative to its price target. Finally, FTK has better sentiment signals based on short interest.