SemGroup Corporation (NYSE:SEMG) shares are down more than -13.08% this year and recently increased 3.35% or $0.85 to settle at $26.25. Rice Midstream Partners LP (NYSE:RMP), on the other hand, is down -6.99% year to date as of 02/12/2018. It currently trades at $19.97 and has returned -6.29% during the past week.
SemGroup Corporation (NYSE:SEMG) and Rice Midstream Partners LP (NYSE:RMP) are the two most active stocks in the Oil & Gas Pipelines 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.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Comparatively, RMP is expected to grow at a 15.00% annual rate. All else equal, RMP’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., compared to an EBITDA margin of 72.69% for Rice Midstream Partners LP (RMP). SEMG’s ROI is 4.40% while RMP has a ROI of 9.20%. The interpretation is that RMP’s business generates a higher return on investment than SEMG’s.
If there’s one thing investors care more about than earnings, it’s cash flow. SEMG’s free cash flow (“FCF”) per share for the trailing twelve months was -2.16. Comparatively, RMP’s free cash flow per share was -0.18. On a percent-of-sales basis, SEMG’s free cash flow was -12.76% while RMP converted -0.01% of its revenues into cash flow. This means that, for a given level of sales, RMP is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. SEMG has a current ratio of 1.20 compared to 1.00 for RMP. This means that SEMG can more easily cover its most immediate liabilities over the next twelve months. SEMG’s debt-to-equity ratio is 1.78 versus a D/E of 0.18 for RMP. SEMG is therefore the more solvent of the two companies, and has lower financial risk.
SEMG trades at a forward P/E of 42.07, a P/B of 1.18, and a P/S of 1.13, compared to a forward P/E of 12.17, a P/B of 1.66, and a P/S of 7.73 for RMP. 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. SEMG is currently priced at a -15.92% to its one-year price target of 31.22. Comparatively, RMP is -13.81% relative to its price target of 23.17. This suggests that SEMG 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 2.50 for SEMG and 2.70 for RMP, which implies that analysts are more bullish on the outlook for RMP.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. SEMG has a short ratio of 10.76 compared to a short interest of 4.43 for RMP. This implies that the market is currently less bearish on the outlook for RMP.
Rice Midstream Partners LP (NYSE:RMP) beats SemGroup Corporation (NYSE:SEMG) on a total of 9 of the 14 factors compared between the two stocks. RMP 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. Finally, RMP has better sentiment signals based on short interest.