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Seadrill Limited (SDRL) vs. Organovo Holdings, Inc. (ONVO): Breaking Down the Oil & Gas Drilling & Exploration Industry’s Two Hottest Stocks

Seadrill Limited (NYSE:SDRL) shares are up more than 57.37% this year and recently increased 13.75% or $0.04 to settle at $0.36. Organovo Holdings, Inc. (NASDAQ:ONVO), on the other hand, is up 29.85% year to date as of 05/15/2018. It currently trades at $1.74 and has returned 50.00% during the past week.

Seadrill Limited (NYSE:SDRL) and Organovo Holdings, Inc. (NASDAQ:ONVO) 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 SDRL to grow earnings at a 31.10% annual rate over the next 5 years.

Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. SDRL’s ROI is -37.50% while ONVO has a ROI of -61.90%. The interpretation is that SDRL’s business generates a higher return on investment than ONVO’s.

Cash Flow



The value of a stock is simply the present value of its future free cash flows. SDRL’s free cash flow (“FCF”) per share for the trailing twelve months was +0.10. Comparatively, ONVO’s free cash flow per share was -0.06. On a percent-of-sales basis, SDRL’s free cash flow was 2.42% while ONVO converted -0.16% of its revenues into cash flow. This means that, for a given level of sales, SDRL 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. SDRL has a current ratio of 2.60 compared to 11.70 for ONVO. This means that ONVO can more easily cover its most immediate liabilities over the next twelve months. SDRL’s debt-to-equity ratio is 0.20 versus a D/E of 0.00 for ONVO. SDRL is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

SDRL trades at a P/B of 0.03, and a P/S of 0.08, compared to a P/B of 3.87, and a P/S of 43.44 for ONVO. 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. SDRL is currently priced at a -64% to its one-year price target of 1.00. Comparatively, ONVO is -22.67% relative to its price target of 2.25. This suggests that SDRL 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. SDRL has a beta of 2.92 and ONVO’s beta is 2.73. ONVO’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. SDRL has a short ratio of 5.90 compared to a short interest of 16.37 for ONVO. This implies that the market is currently less bearish on the outlook for SDRL.

Summary

Seadrill Limited (NYSE:SDRL) beats Organovo Holdings, Inc. (NASDAQ:ONVO) on a total of 8 of the 14 factors compared between the two stocks. SDRL is growing fastly, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, SDRL is the cheaper of the two stocks on book value and sales basis, SDRL is more undervalued relative to its price target. Finally, SDRL has better sentiment signals based on short interest.

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