Chesapeake Energy Corporation (NYSE:CHK) shares are up more than 4.55% this year and recently decreased -3.27% or -$0.14 to settle at $4.14. California Resources Corporation (NYSE:CRC), on the other hand, is up 13.22% year to date as of 01/16/2018. It currently trades at $22.01 and has returned 8.16% during the past week.
Chesapeake Energy Corporation (NYSE:CHK) and California Resources Corporation (NYSE:CRC) are the two most active stocks in the Independent Oil & Gas 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 consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect CHK to grow earnings at a 5.00% annual rate over the next 5 years. Comparatively, CRC is expected to grow at a -9.90% annual rate. All else equal, CHK’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. EBITDA margin of 42.99% for California Resources Corporation (CRC). CHK’s ROI is -56.90% while CRC has a ROI of 16.60%. The interpretation is that CRC’s business generates a higher return on investment than CHK’s.
Cash is king when it comes to investing. CHK’s free cash flow (“FCF”) per share for the trailing twelve months was +0.26. Comparatively, CRC’s free cash flow per share was +0.14. On a percent-of-sales basis, CHK’s free cash flow was 3% while CRC converted 0.39% of its revenues into cash flow. This means that, for a given level of sales, CHK is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. CHK has a current ratio of 0.50 compared to 0.60 for CRC. This means that CRC can more easily cover its most immediate liabilities over the next twelve months.
CHK trades at a forward P/E of 5.35, and a P/S of 0.42, compared to a P/S of 0.47 for CRC. CHK is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B 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
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. CHK is currently priced at a -5.69% to its one-year price target of 4.39. Comparatively, CRC is 25.77% relative to its price target of 17.50. This suggests that CHK 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 3.10 for CHK and 3.00 for CRC, which implies that analysts are more bullish on the outlook for CHK.
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.CHK has a short ratio of 6.25 compared to a short interest of 8.51 for CRC. This implies that the market is currently less bearish on the outlook for CHK.
California Resources Corporation (NYSE:CRC) beats Chesapeake Energy Corporation (NYSE:CHK) on a total of 7 of the 13 factors compared between the two stocks. CRC is growing fastly, generates a higher return on investment, higher liquidity and has lower financial risk. Finally, COG has better sentiment signals based on short interest.