Earnings

Critical Comparison: Flotek Industries, Inc. (FTK) vs. Archrock, Inc. (AROC)

Flotek Industries, Inc. (NYSE:FTK) shares are up more than 7.08% this year and recently increased 3.31% or $0.16 to settle at $4.99. Archrock, Inc. (NYSE:AROC), on the other hand, is down -14.29% year to date as of 02/12/2018. It currently trades at $9.00 and has returned -1.64% during the past week.

Flotek Industries, Inc. (NYSE:FTK) and Archrock, Inc. (NYSE:AROC) are the two most active stocks in the Oil & Gas Equipment & Services 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.

Growth

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 FTK to grow earnings at a 10.00% annual rate over the next 5 years. Comparatively, AROC is expected to grow at a -12.91% annual rate. All else equal, FTK’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. Flotek Industries, Inc. (FTK) has an EBITDA margin of 22.01%. This suggests that FTK underlying business is more profitable FTK’s ROI is 1.20% while AROC has a ROI of 0.90%. The interpretation is that FTK’s business generates a higher return on investment than AROC’s.

Cash Flow 




Cash is king when it comes to investing. FTK’s free cash flow (“FCF”) per share for the trailing twelve months was +0.12. Comparatively, AROC’s free cash flow per share was -0.17. On a percent-of-sales basis, FTK’s free cash flow was 0% while AROC converted -0% of its revenues into cash flow. This means that, for a given level of sales, FTK 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. FTK has a current ratio of 2.00 compared to 1.60 for AROC. This means that FTK can more easily cover its most immediate liabilities over the next twelve months. FTK’s debt-to-equity ratio is 0.15 versus a D/E of 1.89 for AROC. AROC is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

FTK trades at a forward P/E of 21.23, a P/B of 1.05, and a P/S of 0.91, compared to a forward P/E of 126.76, a P/B of 0.85, and a P/S of 0.84 for AROC. FTK is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S 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 isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. FTK is currently priced at a -28.71% to its one-year price target of 7.00. Comparatively, AROC is -30.23% relative to its price target of 12.90. This suggests that AROC 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 2.00 for FTK and 2.40 for AROC, which implies that analysts are more bullish on the outlook for AROC.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. FTK has a beta of 1.67 and AROC’s beta is 2.64. FTK’s shares are therefore the less volatile of the two stocks.

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. FTK has a short ratio of 10.67 compared to a short interest of 6.29 for AROC. This implies that the market is currently less bearish on the outlook for AROC.

Summary

Flotek Industries, Inc. (NYSE:FTK) beats Archrock, Inc. (NYSE:AROC) on a total of 9 of the 14 factors compared between the two stocks. FTK is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share, higher liquidity and has lower financial risk. Finally, FRAC has better sentiment signals based on short interest.

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