Diamond Offshore Drilling, Inc. (NYSE:DO) and Rowan Companies plc (NYSE:RDC) are the two most active stocks in the Oil & Gas Drilling & Exploration industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
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. DO’s ROI is -4.50% while RDC has a ROI of 6.20%. The interpretation is that RDC’s business generates a higher return on investment than DO’s.
If there’s one thing investors care more about than earnings, it’s cash flow. DO’s free cash flow (“FCF”) per share for the trailing twelve months was +0.26. Comparatively, RDC’s free cash flow per share was +0.24. On a percent-of-sales basis, DO’s free cash flow was 2.23% while RDC converted 1.64% of its revenues into cash flow. This means that, for a given level of sales, DO is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. DO has a current ratio of 3.70 compared to 5.00 for RDC. This means that RDC can more easily cover its most immediate liabilities over the next twelve months. DO’s debt-to-equity ratio is 0.52 versus a D/E of 0.47 for RDC. DO is therefore the more solvent of the two companies, and has lower financial risk.
DO trades at a forward P/E of 47.35, a P/B of 0.39, and a P/S of 0.99, compared to a forward P/B of 0.23, and a P/S of 0.85 for RDC. 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 is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. DO is currently priced at a -17.19% to its one-year price target of $13.15. Comparatively, RDC is -30.46% relative to its price target of $13.79. This suggests that RDC 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 3.20 for DO and 2.80 for RDC, which implies that analysts are more bullish on the outlook for DO.
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. DO has a beta of 1.13 and RDC’s beta is 1.81. DO’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. DO has a short ratio of 8.11 compared to a short interest of 5.74 for RDC. This implies that the market is currently less bearish on the outlook for RDC.
Rowan Companies plc (NYSE:RDC) beats Diamond Offshore Drilling, Inc. (NYSE:DO) on a total of 9 of the 12 factors compared between the two stocks. RDC has higher cash flow per share, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, RDC is the cheaper of the two stocks on book value and sales basis, RDC is more undervalued relative to its price target. Finally, RDC has better sentiment signals based on short interest.