Keane Group, Inc. (NYSE:FRAC) and MRC Global Inc. (NYSE:MRC) 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect FRAC to grow earnings at a 40.00% annual rate over the next 5 years. Comparatively, MRC is expected to grow at a 15.00% annual rate. All else equal, FRAC’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. Keane Group, Inc. (FRAC) has an EBITDA margin of 5.11%, compared to an EBITDA margin of 1.97% for MRC Global Inc. (MRC). This suggests that FRAC underlying business is more profitable. FRAC’s ROI is -34.10% while MRC has a ROI of -4.20%. The interpretation is that MRC’s business generates a higher return on investment than FRAC’s.
The value of a stock is simply the present value of its future free cash flows. FRAC’s free cash flow (“FCF”) per share for the trailing twelve months was -0.08. Comparatively, MRC’s free cash flow per share was -0.58. On a percent-of-sales basis, FRAC’s free cash flow was -0% while MRC converted -1.8% of its revenues into cash flow. This means that, for a given level of sales, FRAC 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. FRAC has a current ratio of 1.60 compared to 2.30 for MRC. This means that MRC can more easily cover its most immediate liabilities over the next twelve months. FRAC’s debt-to-equity ratio is 0.46 versus a D/E of 0.54 for MRC. MRC is therefore the more solvent of the two companies, and has lower financial risk.
FRAC trades at a forward P/E of 11.05, a P/B of 4.23, and a P/S of 1.85, compared to a forward P/E of 23.21, a P/B of 1.94, and a P/S of 0.46 for MRC. FRAC is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B 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
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. FRAC is currently priced at a -33.37% to its one-year price target of $20.20. Comparatively, MRC is -25.92% relative to its price target of $21.18. This suggests that FRAC 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 2.10 for FRAC and 2.20 for MRC, which implies that analysts are more bullish on the outlook for MRC.
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. MRC’s beta is 1.58.
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. FRAC has a short ratio of 10.01 compared to a short interest of 5.97 for MRC. This implies that the market is currently less bearish on the outlook for MRC.
Keane Group, Inc. (NYSE:FRAC) beats MRC Global Inc. (NYSE:MRC) on a total of 8 of the 13 factors compared between the two stocks. FRAC is growing fastly, is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. FRAC is more undervalued relative to its price target. Finally, SPN has better sentiment signals based on short interest.