EQT Corporation (NYSE:EQT) shares are down more than -16.78% this year and recently decreased -0.84% or -$0.4 to settle at $47.37. Continental Resources, Inc. (NYSE:CLR), on the other hand, is down -3.32% year to date as of 02/13/2018. It currently trades at $51.21 and has returned -4.05% during the past week.
EQT Corporation (NYSE:EQT) and Continental Resources, Inc. (NYSE:CLR) are the two most active stocks in the Independent Oil & Gas 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.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect EQT to grow earnings at a 15.00% annual rate over the next 5 years. Comparatively, CLR is expected to grow at a 0.60% annual rate. All else equal, EQT’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 10.33% for Continental Resources, Inc. (CLR). EQT’s ROI is -0.20% while CLR has a ROI of -0.70%. The interpretation is that EQT’s business generates a higher return on investment than CLR’s.
The value of a stock is simply the present value of its future free cash flows. EQT’s free cash flow (“FCF”) per share for the trailing twelve months was -0.48. Comparatively, CLR’s free cash flow per share was +1.15. On a percent-of-sales basis, EQT’s free cash flow was -5.19% while CLR converted 21.78% of its revenues into cash flow. This means that, for a given level of sales, CLR is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. EQT has a current ratio of 0.60 compared to 0.90 for CLR. This means that CLR can more easily cover its most immediate liabilities over the next twelve months. EQT’s debt-to-equity ratio is 0.56 versus a D/E of 1.55 for CLR. CLR is therefore the more solvent of the two companies, and has lower financial risk.
EQT trades at a forward P/E of 24.35, a P/B of 1.35, and a P/S of 4.84, compared to a forward P/E of 29.62, a P/B of 4.45, and a P/S of 7.32 for CLR. EQT is the cheaper 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
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”. EQT is currently priced at a -36.92% to its one-year price target of 75.09. Comparatively, CLR is -16.89% relative to its price target of 61.62. This suggests that EQT 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 2.20 for EQT and 1.90 for CLR, which implies that analysts are more bullish on the outlook for EQT.
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. EQT has a beta of 0.85 and CLR’s beta is 1.36. EQT’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. EQT has a short ratio of 1.24 compared to a short interest of 5.92 for CLR. This implies that the market is currently less bearish on the outlook for EQT.
EQT Corporation (NYSE:EQT) beats Continental Resources, Inc. (NYSE:CLR) on a total of 10 of the 14 factors compared between the two stocks. EQT is growing fastly, is more profitable, generates a higher return on investment and has lower financial risk. In terms of valuation, EQT is the cheaper of the two stocks on an earnings, book value and sales basis, EQT is more undervalued relative to its price target. Finally, EQT has better sentiment signals based on short interest.