Targa Resources Corp. (NYSE:TRGP) shares are down more than -2.87% this year and recently increased 4.12% or $1.86 to settle at $47.03. Williams Partners L.P. (NYSE:WPZ), on the other hand, is up 2.45% year to date as of 02/12/2018. It currently trades at $39.73 and has returned 1.04% during the past week.
Targa Resources Corp. (NYSE:TRGP) and Williams Partners L.P. (NYSE:WPZ) are the two most active stocks in the Oil & Gas Pipelines industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect TRGP to grow earnings at a 10.90% annual rate over the next 5 years. Comparatively, WPZ is expected to grow at a 8.00% annual rate. All else equal, TRGP’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 44.99% for Williams Partners L.P. (WPZ). TRGP’s ROI is 1.10% while WPZ has a ROI of 2.50%. The interpretation is that WPZ’s business generates a higher return on investment than TRGP’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. TRGP’s free cash flow (“FCF”) per share for the trailing twelve months was -2.30. Comparatively, WPZ’s free cash flow per share was -1.64. On a percent-of-sales basis, TRGP’s free cash flow was -7.41% while WPZ converted -21.33% of its revenues into cash flow. This means that, for a given level of sales, TRGP 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. TRGP has a current ratio of 0.70 compared to 1.10 for WPZ. This means that WPZ can more easily cover its most immediate liabilities over the next twelve months. TRGP’s debt-to-equity ratio is 0.83 versus a D/E of 0.72 for WPZ. TRGP is therefore the more solvent of the two companies, and has lower financial risk.
TRGP trades at a P/B of 1.69, and a P/S of 1.25, compared to a forward P/E of 21.72, a P/B of 1.69, and a P/S of 4.87 for WPZ. 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. TRGP is currently priced at a -12.37% to its one-year price target of 53.67. Comparatively, WPZ is -14.12% relative to its price target of 46.26. This suggests that WPZ 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 TRGP and 1.70 for WPZ, which implies that analysts are more bullish on the outlook for TRGP.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. TRGP has a beta of 1.99 and WPZ’s beta is 1.34. WPZ’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. TRGP has a short ratio of 5.63 compared to a short interest of 4.95 for WPZ. This implies that the market is currently less bearish on the outlook for WPZ.
Williams Partners L.P. (NYSE:WPZ) beats Targa Resources Corp. (NYSE:TRGP) on a total of 9 of the 13 factors compared between the two stocks. WPZ is growing fastly, generates a higher return on investment, has higher cash flow per share, higher liquidity and has lower financial risk. WPZ is more undervalued relative to its price target. Finally, WPZ has better sentiment signals based on short interest.