Delek US Holdings, Inc. (NYSE:DK) and Renewable Energy Group, Inc. (NASDAQ:REGI) are the two most active stocks in the Oil & Gas Refining & Marketing industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider 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. DK’s ROI is -6.70% while REGI has a ROI of 6.00%. The interpretation is that REGI’s business generates a higher return on investment than DK’s.
The value of a stock is simply the present value of its future free cash flows. DK’s free cash flow (“FCF”) per share for the trailing twelve months was -0.32. Comparatively, REGI’s free cash flow per share was -1.00. On a percent-of-sales basis, DK’s free cash flow was -0.62% while REGI converted -1.9% of its revenues into cash flow. This means that, for a given level of sales, DK is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. DK has a current ratio of 1.50 compared to 1.90 for REGI. This means that REGI can more easily cover its most immediate liabilities over the next twelve months. DK’s debt-to-equity ratio is 0.85 versus a D/E of 0.61 for REGI. DK is therefore the more solvent of the two companies, and has lower financial risk.
DK trades at a forward P/E of 24.32, a P/B of 1.41, and a P/S of 0.39, compared to a forward P/E of 6.65, a P/B of 0.79, and a P/S of 0.21 for REGI. DK is the expensive 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. DK is currently priced at a -21.16% to its one-year price target of $28.07. Comparatively, REGI is -24.98% relative to its price target of $15.33. This suggests that REGI 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 2.70 for DK and 2.00 for REGI, which implies that analysts are more bullish on the outlook for DK.
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. DK has a beta of 1.90 and REGI’s beta is 1.75. REGI’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. DK has a short ratio of 4.36 compared to a short interest of 20.41 for REGI. This implies that the market is currently less bearish on the outlook for DK.
Renewable Energy Group, Inc. (NASDAQ:REGI) beats Delek US Holdings, Inc. (NYSE:DK) on a total of 10 of the 13 factors compared between the two stocks. REGI has higher cash flow per share, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, REGI is the cheaper of the two stocks on an earnings, book value and sales basis, REGI is more undervalued relative to its price target. Finally, CNNX has better sentiment signals based on short interest.