QEP Resources, Inc. (NYSE:QEP) shares are down more than -52.04% this year and recently increased 2.08% or $0.18 to settle at $8.83. Centennial Resource Development, Inc. (NASDAQ:CDEV), on the other hand, is down -3.70% year to date as of 12/18/2017. It currently trades at $18.99 and has returned -1.56% during the past week.
QEP Resources, Inc. (NYSE:QEP) and Centennial Resource Development, Inc. (NASDAQ:CDEV) are the two most active stocks in the Oil & Gas Pipelines industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect QEP to grow earnings at a 18.00% annual rate over the next 5 years. Comparatively, CDEV is expected to grow at a 49.50% annual rate. All else equal, CDEV’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. EBITDA margin of 36.39% for Centennial Resource Development, Inc. (CDEV). QEP’s ROI is -16.20% while CDEV has a ROI of -9.10%. The interpretation is that CDEV’s business generates a higher return on investment than QEP’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. QEP’s free cash flow (“FCF”) per share for the trailing twelve months was -0.70. Comparatively, CDEV’s free cash flow per share was -0.52. On a percent-of-sales basis, QEP’s free cash flow was -12.24% while CDEV converted -0.15% of its revenues into cash flow. This means that, for a given level of sales, CDEV 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. QEP has a current ratio of 1.60 compared to 0.40 for CDEV. This means that QEP can more easily cover its most immediate liabilities over the next twelve months. QEP’s debt-to-equity ratio is 0.56 versus a D/E of 0.00 for CDEV. QEP is therefore the more solvent of the two companies, and has lower financial risk.
QEP trades at a P/B of 0.58, and a P/S of 1.36, compared to a forward P/E of 32.46, a P/B of 1.55, and a P/S of 13.76 for CDEV. QEP 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
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. QEP is currently priced at a -35.03% to its one-year price target of 13.59. Comparatively, CDEV is -21.33% relative to its price target of 24.14. This suggests that QEP 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 QEP and 1.60 for CDEV, which implies that analysts are more bullish on the outlook for QEP.
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.QEP has a short ratio of 2.78 compared to a short interest of 9.05 for CDEV. This implies that the market is currently less bearish on the outlook for QEP.
Centennial Resource Development, Inc. (NASDAQ:CDEV) beats QEP Resources, Inc. (NYSE:QEP) on a total of 8 of the 14 factors compared between the two stocks. CDEV higher liquidity, is more profitable, 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, QEP is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, GEL has better sentiment signals based on short interest.