Denbury Resources Inc. (NYSE:DNR) shares are down more than -9.95% this year and recently decreased -2.45% or -$0.05 to settle at $1.99. Cabot Oil & Gas Corporation (NYSE:COG), on the other hand, is down -17.03% year to date as of 02/13/2018. It currently trades at $23.73 and has returned -3.54% during the past week.
Denbury Resources Inc. (NYSE:DNR) and Cabot Oil & Gas Corporation (NYSE:COG) 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.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Comparatively, COG is expected to grow at a 36.45% annual rate. All else equal, COG’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 25.04% for Cabot Oil & Gas Corporation (COG). DNR’s ROI is -20.90% while COG has a ROI of -8.00%. The interpretation is that COG’s business generates a higher return on investment than DNR’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. DNR’s free cash flow (“FCF”) per share for the trailing twelve months was -0.01. Comparatively, COG’s free cash flow per share was -0.06. On a percent-of-sales basis, DNR’s free cash flow was -0% while COG converted -2.4% of its revenues into cash flow. This means that, for a given level of sales, DNR 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. DNR has a current ratio of 0.50 compared to 1.60 for COG. This means that COG can more easily cover its most immediate liabilities over the next twelve months. DNR’s debt-to-equity ratio is 6.07 versus a D/E of 0.58 for COG. DNR is therefore the more solvent of the two companies, and has lower financial risk.
DNR trades at a forward P/E of 6.55, a P/B of 1.51, and a P/S of 0.74, compared to a forward P/E of 23.36, a P/B of 4.15, and a P/S of 6.53 for COG. DNR 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
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. DNR is currently priced at a -18.78% to its one-year price target of 2.45. Comparatively, COG is -26.07% relative to its price target of 32.10. This suggests that COG 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 2.90 for DNR and 2.20 for COG, which implies that analysts are more bullish on the outlook for DNR.
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. DNR has a beta of 3.33 and COG’s beta is 0.55. COG’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. DNR has a short ratio of 7.57 compared to a short interest of 2.88 for COG. This implies that the market is currently less bearish on the outlook for COG.
Cabot Oil & Gas Corporation (NYSE:COG) beats Denbury Resources Inc. (NYSE:DNR) on a total of 8 of the 14 factors compared between the two stocks. COG is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, DNR is the cheaper of the two stocks on an earnings, book value and sales basis, COG is more undervalued relative to its price target. Finally, COG has better sentiment signals based on short interest.