Hess Corporation (NYSE:HES) shares are down more than -9.84% this year and recently decreased -3.04% or -$1.34 to settle at $42.80. Laredo Petroleum, Inc. (NYSE:LPI), on the other hand, is down -28.65% year to date as of 02/13/2018. It currently trades at $7.57 and has returned -15.32% during the past week.
Hess Corporation (NYSE:HES) and Laredo Petroleum, Inc. (NYSE:LPI) are the two most active stocks in the Independent Oil & Gas industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect HES to grow earnings at a 5.00% annual rate over the next 5 years. Comparatively, LPI is expected to grow at a 12.52% annual rate. All else equal, LPI’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. EBITDA margin of 43.27% for Laredo Petroleum, Inc. (LPI). HES’s ROI is -27.00% while LPI has a ROI of -5.80%. The interpretation is that LPI’s business generates a higher return on investment than HES’s.
If there’s one thing investors care more about than earnings, it’s cash flow. HES’s free cash flow (“FCF”) per share for the trailing twelve months was -0.96. Comparatively, LPI’s free cash flow per share was -0.16. On a percent-of-sales basis, HES’s free cash flow was -5.64% while LPI converted -0.01% of its revenues into cash flow. This means that, for a given level of sales, LPI is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. HES has a current ratio of 1.80 compared to 0.60 for LPI. This means that HES can more easily cover its most immediate liabilities over the next twelve months. HES’s debt-to-equity ratio is 0.51 versus a D/E of 4.16 for LPI. LPI is therefore the more solvent of the two companies, and has lower financial risk.
HES trades at a P/B of 1.03, and a P/S of 2.50, compared to a forward P/E of 7.34, a P/B of 5.22, and a P/S of 2.44 for LPI. 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. HES is currently priced at a -23.54% to its one-year price target of 55.98. Comparatively, LPI is -43.04% relative to its price target of 13.29. This suggests that LPI 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 2.50 for HES and 2.50 for LPI, which implies that analysts are equally bullish on their outlook for the two stocks.
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. HES has a beta of 1.58 and LPI’s beta is 1.36. LPI’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. HES has a short ratio of 6.15 compared to a short interest of 5.74 for LPI. This implies that the market is currently less bearish on the outlook for LPI.
Laredo Petroleum, Inc. (NYSE:LPI) beats Hess Corporation (NYSE:HES) on a total of 9 of the 14 factors compared between the two stocks. LPI higher liquidity, is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. LPI is more undervalued relative to its price target. Finally, LPI has better sentiment signals based on short interest.