The Williams Companies, Inc. (NYSE:WMB) shares are down more than -3.51% this year and recently increased 2.83% or $0.81 to settle at $29.42. Plains All American Pipeline, L.P. (NYSE:PAA), on the other hand, is up 6.88% year to date as of 02/12/2018. It currently trades at $22.06 and has returned 9.05% during the past week.
The Williams Companies, Inc. (NYSE:WMB) and Plains All American Pipeline, L.P. (NYSE:PAA) are the two most active stocks in the Oil & Gas Pipelines 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.
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 WMB to grow earnings at a 10.00% annual rate over the next 5 years. Comparatively, PAA is expected to grow at a 12.80% annual rate. All else equal, PAA’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 7.72% for Plains All American Pipeline, L.P. (PAA). WMB’s ROI is 1.00% while PAA has a ROI of 5.10%. The interpretation is that PAA’s business generates a higher return on investment than WMB’s.
If there’s one thing investors care more about than earnings, it’s cash flow. WMB’s free cash flow (“FCF”) per share for the trailing twelve months was -0.24. Comparatively, PAA’s free cash flow per share was -. On a percent-of-sales basis, WMB’s free cash flow was -2.65% while PAA converted 0% of its revenues into cash flow. This means that, for a given level of sales, PAA 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. WMB has a current ratio of 1.00 compared to 1.00 for PAA. This means that WMB can more easily cover its most immediate liabilities over the next twelve months. WMB’s debt-to-equity ratio is 2.60 versus a D/E of 1.31 for PAA. WMB is therefore the more solvent of the two companies, and has lower financial risk.
WMB trades at a forward P/E of 30.08, a P/B of 3.00, and a P/S of 3.04, compared to a forward P/E of 13.15, a P/B of 1.84, and a P/S of 0.59 for PAA. WMB 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 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. WMB is currently priced at a -17.68% to its one-year price target of 35.74. Comparatively, PAA is -11.05% relative to its price target of 24.80. This suggests that WMB 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 WMB and 2.20 for PAA, which implies that analysts are more bullish on the outlook for PAA.
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. WMB has a beta of 1.26 and PAA’s beta is 0.79. PAA’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. WMB has a short ratio of 3.27 compared to a short interest of 2.90 for PAA. This implies that the market is currently less bearish on the outlook for PAA.
Plains All American Pipeline, L.P. (NYSE:PAA) beats The Williams Companies, Inc. (NYSE:WMB) on a total of 10 of the 14 factors compared between the two stocks. PAA 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. In terms of valuation, PAA 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.