Tallgrass Energy GP, LP (NYSE:TEGP) shares are down more than -12.35% this year and recently decreased -0.97% or -$0.22 to settle at $22.56. Shell Midstream Partners, L.P. (NYSE:SHLX), on the other hand, is down -12.78% year to date as of 02/12/2018. It currently trades at $26.01 and has returned -0.91% during the past week.
Tallgrass Energy GP, LP (NYSE:TEGP) and Shell Midstream Partners, L.P. (NYSE:SHLX) 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 TEGP to grow earnings at a 15.84% annual rate over the next 5 years. Comparatively, SHLX is expected to grow at a 13.50% annual rate. All else equal, TEGP’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 106.73% for Shell Midstream Partners, L.P. (SHLX). TEGP’s ROI is 12.50% while SHLX has a ROI of 5.50%. The interpretation is that TEGP’s business generates a higher return on investment than SHLX’s.
Cash is king when it comes to investing. TEGP’s free cash flow (“FCF”) per share for the trailing twelve months was +2.97. Comparatively, SHLX’s free cash flow per share was -0.36. On a percent-of-sales basis, TEGP’s free cash flow was 0.08% while SHLX converted -0.03% of its revenues into cash flow. This means that, for a given level of sales, TEGP 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. TEGP has a current ratio of 0.60 compared to 3.40 for SHLX. This means that SHLX can more easily cover its most immediate liabilities over the next twelve months. TEGP’s debt-to-equity ratio is 9.65 versus a D/E of 0.45 for SHLX. TEGP is therefore the more solvent of the two companies, and has lower financial risk.
TEGP trades at a forward P/E of 19.23, a P/B of 5.60, and a P/S of 5.89, compared to a forward P/E of 16.23, a P/B of 2.06, and a P/S of 14.53 for SHLX. TEGP is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B 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
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. TEGP is currently priced at a -17.96% to its one-year price target of 27.50. Comparatively, SHLX is -22.13% relative to its price target of 33.40. This suggests that SHLX 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 2.60 for TEGP and 2.30 for SHLX, which implies that analysts are more bullish on the outlook for TEGP.
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. TEGP has a short ratio of 6.12 compared to a short interest of 3.35 for SHLX. This implies that the market is currently less bearish on the outlook for SHLX.
Shell Midstream Partners, L.P. (NYSE:SHLX) beats Tallgrass Energy GP, LP (NYSE:TEGP) on a total of 8 of the 14 factors compared between the two stocks. SHLX is growing fastly, higher liquidity and has lower financial risk. In terms of valuation, SHLX is the cheaper of the two stocks on an earnings and book value, SHLX is more undervalued relative to its price target. Finally, SHLX has better sentiment signals based on short interest.