Finance

Comparing Southwestern Energy Company (SWN) and Macy’s, Inc. (M)

Southwestern Energy Company (NYSE:SWN) shares are down more than -20.97% this year and recently increased 2.80% or $0.12 to settle at $4.41. Macy’s, Inc. (NYSE:M), on the other hand, is up 22.79% year to date as of 04/05/2018. It currently trades at $30.93 and has returned 6.40% during the past week.

Southwestern Energy Company (NYSE:SWN) and Macy’s, Inc. (NYSE:M) 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.

Growth

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 SWN to grow earnings at a 15.60% annual rate over the next 5 years. Comparatively, M is expected to grow at a 18.64% annual rate. All else equal, M’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. 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 11.35% for Macy’s, Inc. (M). SWN’s ROI is 10.80% while M has a ROI of 8.70%. The interpretation is that SWN’s business generates a higher return on investment than M’s.

Cash Flow



Earnings don’t always accurately reflect the amount of cash that a company brings in. SWN’s free cash flow (“FCF”) per share for the trailing twelve months was -0.05. Comparatively, M’s free cash flow per share was +4.27. On a percent-of-sales basis, SWN’s free cash flow was -0.92% while M converted 5.24% of its revenues into cash flow. This means that, for a given level of sales, M 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. SWN has a current ratio of 1.90 compared to 1.30 for M. This means that SWN can more easily cover its most immediate liabilities over the next twelve months. SWN’s debt-to-equity ratio is 2.22 versus a D/E of 1.49 for M. SWN is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

SWN trades at a forward P/E of 5.03, a P/B of 1.12, and a P/S of 0.81, compared to a forward P/E of 9.61, a P/B of 2.23, and a P/S of 0.38 for M. 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. SWN is currently priced at a -29.89% to its one-year price target of 6.29. Comparatively, M is 4.11% relative to its price target of 29.71. This suggests that SWN is the better investment over the next year.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. SWN has a beta of 0.73 and M’s beta is 0.77. SWN’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. SWN has a short ratio of 2.09 compared to a short interest of 5.03 for M. This implies that the market is currently less bearish on the outlook for SWN.

Summary

Southwestern Energy Company (NYSE:SWN) beats Macy’s, Inc. (NYSE:M) on a total of 8 of the 14 factors compared between the two stocks. SWN is more profitable, generates a higher return on investment and higher liquidity. In terms of valuation, SWN is the cheaper of the two stocks on an earnings and book value, SWN is more undervalued relative to its price target. Finally, SWN has better sentiment signals based on short interest.

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