Devon Energy Corporation (NYSE:DVN) shares are down more than -16.50% this year and recently decreased -3.38% or -$1.21 to settle at $34.57. WPX Energy, Inc. (NYSE:WPX), on the other hand, is down -6.11% year to date as of 02/13/2018. It currently trades at $13.21 and has returned -9.64% during the past week.
Devon Energy Corporation (NYSE:DVN) and WPX Energy, Inc. (NYSE:WPX) 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.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. Devon Energy Corporation (DVN) has an EBITDA margin of 28.1%. This suggests that DVN underlying business is more profitable DVN’s ROI is -18.60% while WPX has a ROI of -7.00%. The interpretation is that WPX’s business generates a higher return on investment than DVN’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. DVN’s free cash flow (“FCF”) per share for the trailing twelve months was +0.01. Comparatively, WPX’s free cash flow per share was -0.58. On a percent-of-sales basis, DVN’s free cash flow was 0.04% while WPX converted -0.03% of its revenues into cash flow. This means that, for a given level of sales, DVN 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. DVN has a current ratio of 1.60 compared to 1.00 for WPX. This means that DVN can more easily cover its most immediate liabilities over the next twelve months. DVN’s debt-to-equity ratio is 1.46 versus a D/E of 0.00 for WPX. DVN is therefore the more solvent of the two companies, and has lower financial risk.
DVN trades at a forward P/E of 11.32, a P/B of 2.52, and a P/S of 1.43, compared to a forward P/E of 128.25, a P/B of 1.34, and a P/S of 4.45 for WPX. 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”. DVN is currently priced at a -30.96% to its one-year price target of 50.07. Comparatively, WPX is -30.22% relative to its price target of 18.93. This suggests that DVN 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 DVN and 1.80 for WPX, which implies that analysts are more bullish on the outlook for DVN.
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. DVN has a beta of 2.03 and WPX’s beta is 2.29. DVN’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. DVN has a short ratio of 2.71 compared to a short interest of 4.43 for WPX. This implies that the market is currently less bearish on the outlook for DVN.
Devon Energy Corporation (NYSE:DVN) beats WPX Energy, Inc. (NYSE:WPX) on a total of 9 of the 14 factors compared between the two stocks. DVN is more profitable, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, DVN is the cheaper of the two stocks on an earnings and sales basis, DVN is more undervalued relative to its price target. Finally, DVN has better sentiment signals based on short interest.