Earnings

Dissecting the Numbers for Fairmount Santrol Holdings Inc. (FMSA) and Hi-Crush Partners LP (HCLP)

Fairmount Santrol Holdings Inc. (NYSE:FMSA) shares are down more than -8.80% this year and recently increased 0.21% or $0.01 to settle at $4.77. Hi-Crush Partners LP (NYSE:HCLP), on the other hand, is up 10.75% year to date as of 02/13/2018. It currently trades at $11.85 and has returned -3.27% during the past week.

Fairmount Santrol Holdings Inc. (NYSE:FMSA) and Hi-Crush Partners LP (NYSE:HCLP) are the two most active stocks in the Industrial Metals & Minerals 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.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Comparatively, HCLP is expected to grow at a -1.42% annual rate. All else equal, FMSA’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 15.66% for Hi-Crush Partners LP (HCLP). FMSA’s ROI is -6.80% while HCLP has a ROI of -13.70%. The interpretation is that FMSA’s business generates a higher return on investment than HCLP’s.

Cash Flow 




If there’s one thing investors care more about than earnings, it’s cash flow. FMSA’s free cash flow (“FCF”) per share for the trailing twelve months was +0.14. Comparatively, HCLP’s free cash flow per share was -0.02. On a percent-of-sales basis, FMSA’s free cash flow was 0.01% while HCLP converted -0% of its revenues into cash flow. This means that, for a given level of sales, FMSA is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. FMSA has a current ratio of 2.50 compared to 1.80 for HCLP. This means that FMSA can more easily cover its most immediate liabilities over the next twelve months. FMSA’s debt-to-equity ratio is 2.69 versus a D/E of 0.25 for HCLP. FMSA is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

FMSA trades at a forward P/E of 8.27, a P/B of 3.61, and a P/S of 1.34, compared to a forward P/E of 5.21, a P/B of 1.37, and a P/S of 2.39 for HCLP. FMSA 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

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. FMSA is currently priced at a -22.82% to its one-year price target of 6.18. Comparatively, HCLP is -23.3% relative to its price target of 15.45. This suggests that HCLP 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 FMSA and 1.90 for HCLP, which implies that analysts are more bullish on the outlook for FMSA.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. FMSA has a beta of 2.01 and HCLP’s beta is 1.12. HCLP’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. FMSA has a short ratio of 6.72 compared to a short interest of 2.82 for HCLP. This implies that the market is currently less bearish on the outlook for HCLP.

Summary

Hi-Crush Partners LP (NYSE:HCLP) beats Fairmount Santrol Holdings Inc. (NYSE:FMSA) on a total of 8 of the 14 factors compared between the two stocks. HCLP is growing fastly and has lower financial risk. In terms of valuation, HCLP is the cheaper of the two stocks on an earnings and book value, HCLP is more undervalued relative to its price target. Finally, HCLP has better sentiment signals based on short interest.

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