NuStar Energy L.P. (NYSE:NS) shares are down more than -19.90% this year and recently decreased -1.24% or -$0.3 to settle at $23.99. Centennial Resource Development, Inc. (NASDAQ:CDEV), on the other hand, is down -5.71% year to date as of 02/12/2018. It currently trades at $18.67 and has returned -2.76% during the past week.
NuStar Energy L.P. (NYSE:NS) and Centennial Resource Development, Inc. (NASDAQ:CDEV) are the two most active stocks in the Oil & Gas Pipelines 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 NS to grow earnings at a 14.16% annual rate over the next 5 years. Comparatively, CDEV is expected to grow at a 45.30% annual rate. All else equal, CDEV’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. 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 36.39% for Centennial Resource Development, Inc. (CDEV). NS’s ROI is 6.50% while CDEV has a ROI of -9.10%. The interpretation is that NS’s business generates a higher return on investment than CDEV’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. On a percent-of-sales basis, NS’s free cash flow was 0% while CDEV converted -0.15% of its revenues into cash flow. This means that, for a given level of sales, NS 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. NS has a current ratio of 0.40 compared to 0.40 for CDEV. This means that NS can more easily cover its most immediate liabilities over the next twelve months. NS’s debt-to-equity ratio is 2.04 versus a D/E of 0.00 for CDEV. NS is therefore the more solvent of the two companies, and has lower financial risk.
NS trades at a forward P/E of 12.83, a P/B of 1.25, and a P/S of 1.27, compared to a forward P/E of 25.54, a P/B of 1.52, and a P/S of 13.38 for CDEV. NS is the cheaper 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. NS is currently priced at a -29.89% to its one-year price target of 34.22. Comparatively, CDEV is -27.21% relative to its price target of 25.65. This suggests that NS 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 2.90 for NS and 1.60 for CDEV, which implies that analysts are more bullish on the outlook for NS.
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.NS has a short ratio of 4.87 compared to a short interest of 7.30 for CDEV. This implies that the market is currently less bearish on the outlook for NS.
NuStar Energy L.P. (NYSE:NS) beats Centennial Resource Development, Inc. (NASDAQ:CDEV) on a total of 9 of the 14 factors compared between the two stocks. NS generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, NS is the cheaper of the two stocks on an earnings, book value and sales basis, NS is more undervalued relative to its price target. Finally, NS has better sentiment signals based on short interest.