Markets

A Side-by-side Analysis of NOW Inc. (DNOW) and Flotek Industries, Inc. (FTK)

NOW Inc. (NYSE:DNOW) and Flotek Industries, Inc. (NYSE:FTK) are the two most active stocks in the Oil & Gas Equipment & Services 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.

Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. DNOW’s ROI is -18.10% while FTK has a ROI of 1.20%. The interpretation is that FTK’s business generates a higher return on investment than DNOW’s.

Cash Flow 



The value of a stock is simply the present value of its future free cash flows. DNOW’s free cash flow (“FCF”) per share for the trailing twelve months was -0.49. Comparatively, FTK’s free cash flow per share was -0.13. On a percent-of-sales basis, DNOW’s free cash flow was -2.51% while FTK converted -0% of its revenues into cash flow. This means that, for a given level of sales, FTK 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. DNOW has a current ratio of 2.80 compared to 1.90 for FTK. This means that DNOW can more easily cover its most immediate liabilities over the next twelve months. DNOW’s debt-to-equity ratio is 0.11 versus a D/E of 0.15 for FTK. FTK is therefore the more solvent of the two companies, and has lower financial risk.




Valuation

DNOW trades at a forward P/E of 33.39, a P/B of 1.11, and a P/S of 0.57, compared to a forward P/E of 7.73, a P/B of 1.23, and a P/S of 1.13 for FTK. 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. DNOW is currently priced at a -32.29% to its one-year price target of $17.90. Comparatively, FTK is -34.44% relative to its price target of $9.00. This suggests that FTK is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.30 for DNOW and 2.00 for FTK, which implies that analysts are more bullish on the outlook for DNOW.

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. FTK’s beta is 1.84.

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. DNOW has a short ratio of 6.12 compared to a short interest of 12.79 for FTK. This implies that the market is currently less bearish on the outlook for DNOW.

Summary

Flotek Industries, Inc. (NYSE:FTK) beats NOW Inc. (NYSE:DNOW) on a total of 7 of the 12 factors compared between the two stocks. FTK higher liquidity, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. FTK is more undervalued relative to its price target. Finally, SPN has better sentiment signals based on short interest.

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