Marathon Oil Corporation (NYSE:MRO) shares are up more than 7.74% this year and recently decreased -3.08% or -$0.58 to settle at $18.24. ConocoPhillips (NYSE:COP), on the other hand, is up 7.20% year to date as of 01/16/2018. It currently trades at $58.84 and has returned 2.40% during the past week.
Marathon Oil Corporation (NYSE:MRO) and ConocoPhillips (NYSE:COP) are the two most active stocks in the Independent Oil & Gas industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
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 14.51% for ConocoPhillips (COP). MRO’s ROI is -7.30% while COP has a ROI of -3.80%. The interpretation is that COP’s business generates a higher return on investment than MRO’s.
The value of a stock is simply the present value of its future free cash flows. MRO’s free cash flow (“FCF”) per share for the trailing twelve months was -0.01. Comparatively, COP’s free cash flow per share was -0.29. On a percent-of-sales basis, MRO’s free cash flow was -0.21% while COP converted -1.42% of its revenues into cash flow. This means that, for a given level of sales, MRO 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. MRO has a current ratio of 2.10 compared to 2.40 for COP. This means that COP can more easily cover its most immediate liabilities over the next twelve months. MRO’s debt-to-equity ratio is 0.55 versus a D/E of 0.69 for COP. COP is therefore the more solvent of the two companies, and has lower financial risk.
MRO trades at a P/B of 1.32, and a P/S of 3.38, compared to a forward P/E of 34.37, a P/B of 2.34, and a P/S of 2.52 for COP. 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. MRO is currently priced at a -0.6% to its one-year price target of 18.35. Comparatively, COP is 2.06% relative to its price target of 57.65. This suggests that MRO 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 2.30 for MRO and 2.00 for COP, which implies that analysts are more bullish on the outlook for MRO.
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. MRO has a beta of 2.40 and COP’s beta is 1.25. COP’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. MRO has a short ratio of 1.68 compared to a short interest of 3.96 for COP. This implies that the market is currently less bearish on the outlook for MRO.
Marathon Oil Corporation (NYSE:MRO) beats ConocoPhillips (NYSE:COP) on a total of 8 of the 14 factors compared between the two stocks. MRO is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, MRO is the cheaper of the two stocks on an earnings and book value, MRO is more undervalued relative to its price target. Finally, MRO has better sentiment signals based on short interest.