Dril-Quip, Inc. (NYSE:DRQ) and Newpark Resources, Inc. (NYSE:NR) 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 EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. Dril-Quip, Inc. (DRQ) has an EBITDA margin of 12.46%, compared to an EBITDA margin of 4.7% for Newpark Resources, Inc. (NR). This suggests that DRQ underlying business is more profitable. DRQ’s ROI is 6.70% while NR has a ROI of -4.80%. The interpretation is that DRQ’s business generates a higher return on investment than NR’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. DRQ’s free cash flow (“FCF”) per share for the trailing twelve months was +0.51. Comparatively, NR’s free cash flow per share was +0.28. On a percent-of-sales basis, DRQ’s free cash flow was 0% while NR converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, NR 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. DRQ has a current ratio of 11.90 compared to 2.40 for NR. This means that DRQ can more easily cover its most immediate liabilities over the next twelve months. DRQ’s debt-to-equity ratio is 0.00 versus a D/E of 0.31 for NR. NR is therefore the more solvent of the two companies, and has lower financial risk.
DRQ trades at a forward P/E of 124.06, a P/B of 1.08, and a P/S of 3.21, compared to a forward P/E of 17.49, a P/B of 1.27, and a P/S of 1.16 for NR. DRQ is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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. DRQ is currently priced at a -16.86% to its one-year price target of $47.75. Comparatively, NR is -20.19% relative to its price target of $9.71. This suggests that NR 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 3.00 for DRQ and 2.10 for NR, which implies that analysts are more bullish on the outlook for DRQ.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. DRQ has a beta of 0.67 and NR’s beta is 1.61. DRQ’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. DRQ has a short ratio of 10.87 compared to a short interest of 9.07 for NR. This implies that the market is currently less bearish on the outlook for NR.
Dril-Quip, Inc. (NYSE:DRQ) beats Newpark Resources, Inc. (NYSE:NR) on a total of 7 of the 13 factors compared between the two stocks. DRQ is more profitable, generates a higher return on investment, has higher cash flow per share, higher liquidity and has lower financial risk. Finally, SPN has better sentiment signals based on short interest.