QEP Resources, Inc. (NYSE:QEP) shares are down more than -18.50% this year and recently increased 3.86% or $0.29 to settle at $7.80. Energy Transfer Equity, L.P. (NYSE:ETE), on the other hand, is down -1.27% year to date as of 02/12/2018. It currently trades at $17.04 and has returned 0.24% during the past week.
QEP Resources, Inc. (NYSE:QEP) and Energy Transfer Equity, L.P. (NYSE:ETE) are the two most active stocks in the Oil & Gas Pipelines industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Comparatively, ETE is expected to grow at a 13.00% annual rate. All else equal, ETE’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. EBITDA margin of 12.14% for Energy Transfer Equity, L.P. (ETE). QEP’s ROI is -16.20% while ETE has a ROI of 4.30%. The interpretation is that ETE’s business generates a higher return on investment than QEP’s.
The value of a stock is simply the present value of its future free cash flows. QEP’s free cash flow (“FCF”) per share for the trailing twelve months was -0.70. Comparatively, ETE’s free cash flow per share was -1.38. On a percent-of-sales basis, QEP’s free cash flow was -12.24% while ETE converted -3.97% of its revenues into cash flow. This means that, for a given level of sales, ETE is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. QEP has a current ratio of 1.60 compared to 1.40 for ETE. This means that QEP can more easily cover its most immediate liabilities over the next twelve months.
QEP trades at a forward P/E of 2600.00, a P/B of 0.52, and a P/S of 1.20, compared to a forward P/E of 10.01, and a P/S of 0.48 for ETE. QEP is the expensive 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 -41.75% to its one-year price target of 13.39. Comparatively, ETE is -17.48% relative to its price target of 20.65. 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 1.90 for ETE, which implies that analysts are more bullish on the outlook for QEP.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. QEP has a beta of 1.74 and ETE’s beta is 1.68. ETE’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. QEP has a short ratio of 3.80 compared to a short interest of 6.51 for ETE. This implies that the market is currently less bearish on the outlook for QEP.
Energy Transfer Equity, L.P. (NYSE:ETE) beats QEP Resources, Inc. (NYSE:QEP) on a total of 10 of the 14 factors compared between the two stocks. ETE has higher cash flow per share, is more profitable, generates a higher return on investment, has a higher cash conversion rate and has lower financial risk. In terms of valuation, ETE is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, PAA has better sentiment signals based on short interest.