Finance

Choosing Between Rowan Companies plc (RDC) and Eaton Vance Corp. (EV)

Rowan Companies plc (NYSE:RDC) shares are down more than -2.87% this year and recently decreased -1.49% or -$0.23 to settle at $15.21. Eaton Vance Corp. (NYSE:EV), on the other hand, is down -2.55% year to date as of 06/13/2018. It currently trades at $54.95 and has returned -1.96% during the past week.

Rowan Companies plc (NYSE:RDC) and Eaton Vance Corp. (NYSE:EV) are the two most active stocks in the Oil & Gas Drilling & Exploration 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 RDC to grow earnings at a -4.40% annual rate over the next 5 years. Comparatively, EV is expected to grow at a 19.27% annual rate. All else equal, EV’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 34.13% for Eaton Vance Corp. (EV). RDC’s ROI is 2.70% while EV has a ROI of 18.50%. The interpretation is that EV’s business generates a higher return on investment than RDC’s.

Cash Flow



Cash is king when it comes to investing. RDC’s free cash flow (“FCF”) per share for the trailing twelve months was -0.93. Comparatively, EV’s free cash flow per share was +0.95. On a percent-of-sales basis, RDC’s free cash flow was -9.2% while EV converted 7.4% of its revenues into cash flow. This means that, for a given level of sales, EV is able to generate more free cash flow for investors.

Liquidity and Financial Risk

RDC’s debt-to-equity ratio is 0.00 versus a D/E of 0.65 for EV. EV is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

RDC trades at a P/B of 0.36, and a P/S of 1.72, compared to a forward P/E of 14.89, a P/B of 5.81, and a P/S of 4.02 for EV. RDC 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. RDC is currently priced at a 4.11% to its one-year price target of 14.61. Comparatively, EV is -8.42% relative to its price target of 60.00. This suggests that EV 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. RDC has a beta of 1.84 and EV’s beta is 1.64. EV’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. RDC has a short ratio of 6.10 compared to a short interest of 4.83 for EV. This implies that the market is currently less bearish on the outlook for EV.

Summary




Eaton Vance Corp. (NYSE:EV) beats Rowan Companies plc (NYSE:RDC) on a total of 8 of the 14 factors compared between the two stocks. EV is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, RDC is the cheaper of the two stocks on an earnings, book value and sales basis, EV is more undervalued relative to its price target. Finally, EV has better sentiment signals based on short interest.

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