Schlumberger Limited (NYSE:SLB) shares are up more than 1.68% this year and recently increased 0.84% or $0.57 to settle at $68.52. BP p.l.c. (NYSE:BP), on the other hand, is up 1.64% year to date as of 04/16/2018. It currently trades at $42.72 and has returned 2.54% during the past week.
Schlumberger Limited (NYSE:SLB) and BP p.l.c. (NYSE:BP) are the two most active stocks in the Oil & Gas Equipment & Services 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 consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect SLB to grow earnings at a 46.64% annual rate over the next 5 years.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. Schlumberger Limited (SLB) has an EBITDA margin of 5.77%. This suggests that SLB underlying business is more profitable SLB’s ROI is -1.90% while BP has a ROI of 2.10%. The interpretation is that BP’s business generates a higher return on investment than SLB’s.Cash Flow
If there’s one thing investors care more about than earnings, it’s cash flow. SLB’s free cash flow (“FCF”) per share for the trailing twelve months was +0.67. Comparatively, BP’s free cash flow per share was +0.00. On a percent-of-sales basis, SLB’s free cash flow was 3.05% while BP converted 0% of its revenues into cash flow. This means that, for a given level of sales, SLB 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. SLB has a current ratio of 1.20 compared to 1.20 for BP. This means that SLB can more easily cover its most immediate liabilities over the next twelve months. SLB’s debt-to-equity ratio is 0.49 versus a D/E of 0.64 for BP. BP is therefore the more solvent of the two companies, and has lower financial risk.Valuation
SLB trades at a forward P/E of 21.59, a P/B of 2.58, and a P/S of 3.12, compared to a forward P/E of 14.45, a P/B of 1.43, and a P/S of 0.59 for BP. SLB is the expensive of the two stocks on an earnings, book value and sales basis. 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. SLB is currently priced at a -15.58% to its one-year price target of 81.17. Comparatively, BP is -5.02% relative to its price target of 44.98. This suggests that SLB is the better investment over the next year.
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. SLB has a beta of 1.08 and BP’s beta is 0.89. BP’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. SLB has a short ratio of 2.69 compared to a short interest of 0.83 for BP. This implies that the market is currently less bearish on the outlook for BP.Summary
Schlumberger Limited (NYSE:SLB) beats BP p.l.c. (NYSE:BP) on a total of 8 of the 14 factors compared between the two stocks. SLB is growing fastly, is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. SLB is more undervalued relative to its price target. Finally, SU has better sentiment signals based on short interest.