ConocoPhillips (NYSE:COP) shares are down more than -2.86% this year and recently decreased -0.17% or -$0.09 to settle at $53.32. Parsley Energy, Inc. (NYSE:PE), on the other hand, is down -23.34% year to date as of 02/13/2018. It currently trades at $22.57 and has returned -3.38% during the past week.
ConocoPhillips (NYSE:COP) and Parsley Energy, Inc. (NYSE:PE) are the two most active stocks in the Independent Oil & Gas industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
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 52.37% for Parsley Energy, Inc. (PE). COP’s ROI is -3.80% while PE has a ROI of 0.40%. The interpretation is that PE’s business generates a higher return on investment than COP’s.
If there’s one thing investors care more about than earnings, it’s cash flow. COP’s free cash flow (“FCF”) per share for the trailing twelve months was +0.54. Comparatively, PE’s free cash flow per share was -1.06. On a percent-of-sales basis, COP’s free cash flow was 1.95% while PE converted -0.07% of its revenues into cash flow. This means that, for a given level of sales, COP is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. COP has a current ratio of 2.40 compared to 0.90 for PE. This means that COP can more easily cover its most immediate liabilities over the next twelve months. COP’s debt-to-equity ratio is 0.69 versus a D/E of 0.32 for PE. COP is therefore the more solvent of the two companies, and has lower financial risk.
COP trades at a forward P/E of 19.00, a P/B of 2.12, and a P/S of 2.21, compared to a forward P/E of 17.74, a P/B of 1.21, and a P/S of 8.88 for PE. COP 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. COP is currently priced at a -19.88% to its one-year price target of 66.55. Comparatively, PE is -41.07% relative to its price target of 38.30. This suggests that PE 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 COP and 1.90 for PE, which implies that analysts are more bullish on the outlook for COP.
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. COP has a beta of 1.22 and PE’s beta is -0.19. PE’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. COP has a short ratio of 3.87 compared to a short interest of 2.31 for PE. This implies that the market is currently less bearish on the outlook for PE.
Parsley Energy, Inc. (NYSE:PE) beats ConocoPhillips (NYSE:COP) on a total of 9 of the 14 factors compared between the two stocks. PE has higher cash flow per share, generates a higher return on investment and has lower financial risk. In terms of valuation, PE is the cheaper of the two stocks on an earnings and book value, PE is more undervalued relative to its price target. Finally, PE has better sentiment signals based on short interest.