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A Side-by-side Analysis of Legacy Reserves LP (LGCY) and Puma Biotechnology, Inc. (PBYI)

Legacy Reserves LP (NASDAQ:LGCY) shares are up more than 439.75% this year and recently increased 4.45% or $0.37 to settle at $8.69. Puma Biotechnology, Inc. (NASDAQ:PBYI), on the other hand, is down -44.87% year to date as of 05/15/2018. It currently trades at $54.50 and has returned -14.78% during the past week.

Legacy Reserves LP (NASDAQ:LGCY) and Puma Biotechnology, Inc. (NASDAQ:PBYI) are the two most active stocks in the Independent Oil & Gas industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

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 LGCY to grow earnings at a 17.50% annual rate over the next 5 years.

Profitability and Returns

A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use Return on Investment (ROI) to measure this. LGCY’s ROI is 2.00% while PBYI has a ROI of -287.20%. The interpretation is that LGCY’s business generates a higher return on investment than PBYI’s.

Cash Flow



Cash is king when it comes to investing. LGCY’s free cash flow (“FCF”) per share for the trailing twelve months was -0.26. Comparatively, PBYI’s free cash flow per share was -0.17. On a percent-of-sales basis, LGCY’s free cash flow was -0% while PBYI converted -0.02% of its revenues into cash flow. This means that, for a given level of sales, LGCY 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. LGCY has a current ratio of 0.80 compared to 1.90 for PBYI. This means that PBYI can more easily cover its most immediate liabilities over the next twelve months.

Valuation

LGCY trades at a forward P/E of 6.90, and a P/S of 1.27, compared to a forward P/E of 109.00, a P/B of 35.86, and a P/S of 26.85 for PBYI. LGCY 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

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. LGCY is currently priced at a 479.33% to its one-year price target of 1.50. Comparatively, PBYI is -43.23% relative to its price target of 96.00. This suggests that PBYI is the better investment over the next year.

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. LGCY has a beta of 2.11 and PBYI’s beta is 0.03. PBYI’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. LGCY has a short ratio of 1.66 compared to a short interest of 3.82 for PBYI. This implies that the market is currently less bearish on the outlook for LGCY.

Summary

Legacy Reserves LP (NASDAQ:LGCY) beats Puma Biotechnology, Inc. (NASDAQ:PBYI) on a total of 8 of the 14 factors compared between the two stocks. LGCY is growing fastly, generates a higher return on investment, has a higher cash conversion rate and has lower financial risk. In terms of valuation, LGCY is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, LGCY has better sentiment signals based on short interest.

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