FirstEnergy Corp. (NYSE:FE) shares are up more than 4.34% this year and recently decreased -0.47% or -$0.15 to settle at $31.95. Devon Energy Corporation (NYSE:DVN), on the other hand, is down -14.11% year to date as of 02/14/2018. It currently trades at $35.56 and has returned -3.26% during the past week.
FirstEnergy Corp. (NYSE:FE) and Devon Energy Corporation (NYSE:DVN) are the two most active stocks in the market 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.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect FE to grow earnings at a -4.74% annual rate over the next 5 years.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. EBITDA margin of 28.1% for Devon Energy Corporation (DVN). FE’s ROI is -18.10% while DVN has a ROI of -18.60%. The interpretation is that FE’s business generates a higher return on investment than DVN’s.
The value of a stock is simply the present value of its future free cash flows. FE’s free cash flow (“FCF”) per share for the trailing twelve months was +1.13. Comparatively, DVN’s free cash flow per share was +0.01. On a percent-of-sales basis, FE’s free cash flow was 3.45% while DVN converted 0.04% of its revenues into cash flow. This means that, for a given level of sales, FE 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. FE has a current ratio of 0.70 compared to 1.60 for DVN. This means that DVN can more easily cover its most immediate liabilities over the next twelve months. FE’s debt-to-equity ratio is 3.54 versus a D/E of 1.46 for DVN. FE is therefore the more solvent of the two companies, and has lower financial risk.
FE trades at a forward P/E of 12.80, a P/B of 2.21, and a P/S of 1.00, compared to a forward P/E of 11.64, a P/B of 2.59, and a P/S of 1.47 for DVN. 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. FE is currently priced at a -11.86% to its one-year price target of 36.25. Comparatively, DVN is -28.98% relative to its price target of 50.07. 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 2.30 for FE and 2.00 for DVN, which implies that analysts are more bullish on the outlook for FE.
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. FE has a beta of 0.41 and DVN’s beta is 2.03. FE’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.FE has a short ratio of 0.00 compared to a short interest of 2.71 for DVN. This implies that the market is currently less bearish on the outlook for FE.
Devon Energy Corporation (NYSE:DVN) beats FirstEnergy Corp. (NYSE:FE) on a total of 7 of the 14 factors compared between the two stocks. DVN generates a higher return on investment, is more profitable, higher liquidity and has lower financial risk. DVN is more undervalued relative to its price target. Finally, SO has better sentiment signals based on short interest.