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Chesapeake Energy Corporation (CHK) vs. United Technologies Corporation (UTX): Comparing the Independent Oil & Gas Industry’s Most Active Stocks

Chesapeake Energy Corporation (NYSE:CHK) shares are down more than -15.15% this year and recently increased 0.30% or $0.01 to settle at $3.36. United Technologies Corporation (NYSE:UTX), on the other hand, is down -2.42% year to date as of 05/11/2018. It currently trades at $124.48 and has returned 4.16% during the past week.

Chesapeake Energy Corporation (NYSE:CHK) and United Technologies Corporation (NYSE:UTX) are the two most active stocks in the Independent Oil & Gas industry 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 consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect CHK to grow earnings at a -12.40% annual rate over the next 5 years. Comparatively, UTX is expected to grow at a 7.50% annual rate. All else equal, UTX’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 17.52% for United Technologies Corporation (UTX). CHK’s ROI is 17.60% while UTX has a ROI of 11.40%. The interpretation is that CHK’s business generates a higher return on investment than UTX’s.

Cash Flow



The amount of free cash flow available to investors is ultimately what determines the value of a stock. CHK’s free cash flow (“FCF”) per share for the trailing twelve months was +0.12. Comparatively, UTX’s free cash flow per share was -0.52. On a percent-of-sales basis, CHK’s free cash flow was 1.15% while UTX converted -0.7% of its revenues into cash flow. This means that, for a given level of sales, CHK 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. CHK has a current ratio of 0.50 compared to 1.30 for UTX. This means that UTX can more easily cover its most immediate liabilities over the next twelve months.

Valuation

CHK trades at a forward P/E of 4.91, and a P/S of 0.33, compared to a forward P/E of 15.93, a P/B of 3.22, and a P/S of 1.61 for UTX. CHK is the cheaper 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

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. CHK is currently priced at a -10.16% to its one-year price target of 3.74. Comparatively, UTX is -15.14% relative to its price target of 146.69. This suggests that UTX 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. CHK has a beta of 1.84 and UTX’s beta is 1.08. UTX’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. CHK has a short ratio of 5.56 compared to a short interest of 3.16 for UTX. This implies that the market is currently less bearish on the outlook for UTX.

Summary

Chesapeake Energy Corporation (NYSE:CHK) beats United Technologies Corporation (NYSE:UTX) on a total of 8 of the 14 factors compared between the two stocks. CHK is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, CHK is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, GG has better sentiment signals based on short interest.

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