Earnings

Comparing RSP Permian, Inc. (RSPP) and Bill Barrett Corporation (BBG)

RSP Permian, Inc. (NYSE:RSPP) shares are down more than -15.88% this year and recently decreased -2.09% or -$0.73 to settle at $34.22. Bill Barrett Corporation (NYSE:BBG), on the other hand, is down -0.78% year to date as of 02/12/2018. It currently trades at $5.09 and has returned -6.09% during the past week.

RSP Permian, Inc. (NYSE:RSPP) and Bill Barrett Corporation (NYSE:BBG) are the two most active stocks in the Oil & Gas Drilling & Exploration 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.

Growth

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 RSPP to grow earnings at a 30.00% annual rate over the next 5 years. Comparatively, BBG is expected to grow at a 31.00% annual rate. All else equal, BBG’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 52.21% for Bill Barrett Corporation (BBG). RSPP’s ROI is 1.10% while BBG has a ROI of -7.10%. The interpretation is that RSPP’s business generates a higher return on investment than BBG’s.

Cash Flow 




Earnings don’t always accurately reflect the amount of cash that a company brings in. RSPP’s free cash flow (“FCF”) per share for the trailing twelve months was -1.88. Comparatively, BBG’s free cash flow per share was +0.01. On a percent-of-sales basis, RSPP’s free cash flow was -0.08% while BBG converted 0% of its revenues into cash flow. This means that, for a given level of sales, BBG is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. RSPP has a current ratio of 0.80 compared to 2.80 for BBG. This means that BBG can more easily cover its most immediate liabilities over the next twelve months. RSPP’s debt-to-equity ratio is 0.35 versus a D/E of 1.30 for BBG. BBG is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

RSPP trades at a forward P/E of 16.75, a P/B of 1.29, and a P/S of 7.96, compared to a P/B of 0.74, and a P/S of 2.29 for BBG. RSPP 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. RSPP is currently priced at a -33.31% to its one-year price target of 51.31. Comparatively, BBG is -27.8% relative to its price target of 7.05. This suggests that RSPP 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 1.70 for RSPP and 2.30 for BBG, which implies that analysts are more bullish on the outlook for BBG.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. RSPP has a beta of 2.06 and BBG’s beta is 3.12. RSPP’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. RSPP has a short ratio of 2.65 compared to a short interest of 1.30 for BBG. This implies that the market is currently less bearish on the outlook for BBG.

Summary

Bill Barrett Corporation (NYSE:BBG) beats RSP Permian, Inc. (NYSE:RSPP) on a total of 8 of the 14 factors compared between the two stocks. BBG is more profitable, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, BBG is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, BBG has better sentiment signals based on short interest.

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