Concho Resources Inc. (NYSE:CXO) shares are up more than 2.10% this year and recently increased 1.56% or $2.35 to settle at $153.37. Suncor Energy Inc. (NYSE:SU), on the other hand, is up 2.21% year to date as of 04/16/2018. It currently trades at $37.53 and has returned 3.67% during the past week.
Concho Resources Inc. (NYSE:CXO) and Suncor Energy Inc. (NYSE:SU) are the two most active stocks in the Oil & Gas Drilling & Exploration 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 increase earnings at a high compound rate over time are attractive to investors. Analysts expect CXO to grow earnings at a 70.68% annual rate over the next 5 years. Comparatively, SU is expected to grow at a 11.13% annual rate. All else equal, CXO’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. Concho Resources Inc. (CXO) has an EBITDA margin of 84.03%. This suggests that CXO underlying business is more profitable CXO’s ROI is 5.80% while SU has a ROI of 5.10%. The interpretation is that CXO’s business generates a higher return on investment than SU’s.Cash Flow
The value of a stock is simply the present value of its future free cash flows. CXO’s free cash flow (“FCF”) per share for the trailing twelve months was -0.09. Comparatively, SU’s free cash flow per share was +0.37. On a percent-of-sales basis, CXO’s free cash flow was -0.52% while SU converted 2.44% of its revenues into cash flow. This means that, for a given level of sales, SU is able to generate more free cash flow for investors.Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. CXO has a current ratio of 0.50 compared to 1.00 for SU. This means that SU can more easily cover its most immediate liabilities over the next twelve months. CXO’s debt-to-equity ratio is 0.31 versus a D/E of 0.34 for SU. SU is therefore the more solvent of the two companies, and has lower financial risk.Valuation
CXO trades at a forward P/E of 26.95, a P/B of 2.54, and a P/S of 8.75, compared to a forward P/E of 17.80, a P/B of 1.72, and a P/S of 2.43 for SU. CXO 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. CXO is currently priced at a -15.03% to its one-year price target of 180.50. Comparatively, SU is -12.37% relative to its price target of 42.83. This suggests that CXO 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. CXO has a beta of 1.00 and SU’s beta is 0.84. SU’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. CXO has a short ratio of 2.83 compared to a short interest of 1.56 for SU. This implies that the market is currently less bearish on the outlook for SU.Summary
Suncor Energy Inc. (NYSE:SU) beats Concho Resources Inc. (NYSE:CXO) on a total of 8 of the 14 factors compared between the two stocks. SU is growing fastly, has a higher cash conversion rate and higher liquidity. In terms of valuation, SU is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, SU has better sentiment signals based on short interest.