Western Gas Partners, LP (NYSE:WES) shares are up more than 1.46% this year and recently increased 3.35% or $1.58 to settle at $48.79. Buckeye Partners, L.P. (NYSE:BPL), on the other hand, is up 3.19% year to date as of 02/12/2018. It currently trades at $51.13 and has returned -1.88% during the past week.
Western Gas Partners, LP (NYSE:WES) and Buckeye Partners, L.P. (NYSE:BPL) 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.
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 WES to grow earnings at a 12.60% annual rate over the next 5 years. Comparatively, BPL is expected to grow at a 0.60% annual rate. All else equal, WES’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 26.61% for Buckeye Partners, L.P. (BPL). WES’s ROI is 11.00% while BPL has a ROI of 8.50%. The interpretation is that WES’s business generates a higher return on investment than BPL’s.
The value of a stock is simply the present value of its future free cash flows. WES’s free cash flow (“FCF”) per share for the trailing twelve months was -0.96. Comparatively, BPL’s free cash flow per share was -. On a percent-of-sales basis, WES’s free cash flow was -8.12% while BPL converted 0% of its revenues into cash flow. This means that, for a given level of sales, BPL 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. WES has a current ratio of 0.90 compared to 1.10 for BPL. This means that BPL can more easily cover its most immediate liabilities over the next twelve months. WES’s debt-to-equity ratio is 0.88 versus a D/E of 1.03 for BPL. BPL is therefore the more solvent of the two companies, and has lower financial risk.
WES trades at a forward P/E of 21.25, a P/B of 2.13, and a P/S of 3.57, compared to a forward P/E of 13.05, a P/B of 1.57, and a P/S of 2.08 for BPL. WES 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. WES is currently priced at a -15.03% to its one-year price target of 57.42. Comparatively, BPL is -11.03% relative to its price target of 57.47. This suggests that WES 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 2.30 for WES and 2.50 for BPL, which implies that analysts are more bullish on the outlook for BPL.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. WES has a beta of 1.04 and BPL’s beta is 0.96. BPL’s shares are therefore the less volatile of the two stocks.
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.WES has a short ratio of 2.93 compared to a short interest of 4.35 for BPL. This implies that the market is currently less bearish on the outlook for WES.
Buckeye Partners, L.P. (NYSE:BPL) beats Western Gas Partners, LP (NYSE:WES) on a total of 7 of the 14 factors compared between the two stocks. BPL is growing fastly, has a higher cash conversion rate and higher liquidity. In terms of valuation, BPL is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, WPZ has better sentiment signals based on short interest.