Earnings

Occidental Petroleum Corporation (OXY) vs. Pepsico, Inc. (PEP): Breaking Down the Independent Oil & Gas Industry’s Two Hottest Stocks

Occidental Petroleum Corporation (NYSE:OXY) shares are down more than -5.17% this year and recently increased 0.19% or $0.13 to settle at $69.85. Pepsico, Inc. (NASDAQ:PEP), on the other hand, is down -9.01% year to date as of 02/14/2018. It currently trades at $109.11 and has returned -3.87% during the past week.

Occidental Petroleum Corporation (NYSE:OXY) and Pepsico, Inc. (NASDAQ:PEP) are the two most active stocks in the market based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Comparatively, PEP is expected to grow at a 7.72% annual rate. All else equal, PEP’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 20.27% for Pepsico, Inc. (PEP). OXY’s ROI is -3.50% while PEP has a ROI of 13.80%. The interpretation is that PEP’s business generates a higher return on investment than OXY’s.

Cash Flow 




Earnings don’t always accurately reflect the amount of cash that a company brings in. OXY’s free cash flow (“FCF”) per share for the trailing twelve months was -0.60. Comparatively, PEP’s free cash flow per share was +1.44. On a percent-of-sales basis, OXY’s free cash flow was -4.55% while PEP converted 3.26% of its revenues into cash flow. This means that, for a given level of sales, PEP 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. OXY has a current ratio of 1.10 compared to 1.40 for PEP. This means that PEP can more easily cover its most immediate liabilities over the next twelve months. OXY’s debt-to-equity ratio is 0.48 versus a D/E of 2.91 for PEP. PEP is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

OXY trades at a forward P/E of 29.15, a P/B of 2.59, and a P/S of 4.49, compared to a forward P/E of 19.24, a P/B of 11.56, and a P/S of 2.45 for PEP. OXY is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S 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

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”. OXY is currently priced at a -10.71% to its one-year price target of 78.23. Comparatively, PEP is -13.09% relative to its price target of 125.55. This suggests that PEP 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 2.60 for OXY and 2.30 for PEP, which implies that analysts are more bullish on the outlook for OXY.

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. OXY has a beta of 0.62 and PEP’s beta is 0.69. OXY’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.OXY has a short ratio of 2.82 compared to a short interest of 2.18 for PEP. This implies that the market is currently less bearish on the outlook for PEP.

Summary

Pepsico, Inc. (NASDAQ:PEP) beats Occidental Petroleum Corporation (NYSE:OXY) on a total of 10 of the 14 factors compared between the two stocks. PEP is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, PEP is the cheaper of the two stocks on an earnings and sales basis, PEP is more undervalued relative to its price target. Finally, PEP has better sentiment signals based on short interest.

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