Superior Energy Services, Inc. (NYSE:SPN) and McDermott International, Inc. (NYSE:MDR) are the two most active stocks in the Oil & Gas Equipment & Services 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
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 Return on Investment (ROI) to measure this. SPN’s ROI is -29.50% while MDR has a ROI of 4.30%. The interpretation is that MDR’s business generates a higher return on investment than SPN’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. SPN’s free cash flow (“FCF”) per share for the trailing twelve months was +0.16. Comparatively, MDR’s free cash flow per share was +0.08. On a percent-of-sales basis, SPN’s free cash flow was 1.69% while MDR converted 0.86% of its revenues into cash flow. This means that, for a given level of sales, SPN is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. SPN has a current ratio of 2.10 compared to 1.60 for MDR. This means that SPN can more easily cover its most immediate liabilities over the next twelve months. SPN’s debt-to-equity ratio is 0.00 versus a D/E of 0.33 for MDR. MDR is therefore the more solvent of the two companies, and has lower financial risk.
SPN trades at a forward P/B of 1.15, and a P/S of 0.87, compared to a forward P/E of 14.28, a P/B of 1.04, and a P/S of 0.68 for MDR. 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. SPN is currently priced at a -40.39% to its one-year price target of $14.73. Comparatively, MDR is -29.13% relative to its price target of $8.48. This suggests that SPN 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 2.40 for SPN and 2.50 for MDR, which implies that analysts are more bullish on the outlook for MDR.
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. SPN has a beta of 2.09 and MDR’s beta is 1.39. MDR’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. SPN has a short ratio of 5.08 compared to a short interest of 5.12 for MDR. This implies that the market is currently less bearish on the outlook for SPN.
Superior Energy Services, Inc. (NYSE:SPN) beats McDermott International, Inc. (NYSE:MDR) on a total of 7 of the 12 factors compared between the two stocks. SPN has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. SPN is more undervalued relative to its price target. Finally, SPN has better sentiment signals based on short interest.