Western Refining Logistics, LP (NYSE:WNRL) and Crestwood Equity Partners LP (NYSE:CEQP) are the two most active stocks in the Oil & Gas Pipelines industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect WNRL to grow earnings at a 17.42% annual rate over the next 5 years. Comparatively, CEQP is expected to grow at a 6.00% annual rate. All else equal, WNRL’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. Western Refining Logistics, LP (WNRL) has an EBITDA margin of 5.03%, compared to an EBITDA margin of 7.58% for Crestwood Equity Partners LP (CEQP). This suggests that CEQP underlying business is more profitable. WNRL’s ROI is 7.60% while CEQP has a ROI of -2.00%. The interpretation is that WNRL’s business generates a higher return on investment than CEQP’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. WNRL’s free cash flow (“FCF”) per share for the trailing twelve months was -0.20. Comparatively, CEQP’s free cash flow per share was -0.33. On a percent-of-sales basis, WNRL’s free cash flow was -0.55% while CEQP converted -0.91% of its revenues into cash flow. This means that, for a given level of sales, WNRL 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. WNRL has a current ratio of 0.10 compared to 1.10 for CEQP. This means that CEQP can more easily cover its most immediate liabilities over the next twelve months. WNRL’s debt-to-equity ratio is 3.45 versus a D/E of 0.98 for CEQP. WNRL is therefore the more solvent of the two companies, and has lower financial risk.
WNRL trades at a forward P/E of 14.17, a P/B of 15.19, and a P/S of 0.63, compared to a forward P/B of 1.04, and a P/S of 0.55 for CEQP. 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. WNRL is currently priced at a -12.72% to its one-year price target of $27.67. Comparatively, CEQP is -7.87% relative to its price target of $26.70. This suggests that WNRL 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 2.30 for WNRL and 2.80 for CEQP, which implies that analysts are more bullish on the outlook for CEQP.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. WNRL has a beta of 0.82 and CEQP’s beta is 2.46. WNRL’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. WNRL has a short ratio of 1.52 compared to a short interest of 3.79 for CEQP. This implies that the market is currently less bearish on the outlook for WNRL.
Western Refining Logistics, LP (NYSE:WNRL) beats Crestwood Equity Partners LP (NYSE:CEQP) on a total of 8 of the 13 factors compared between the two stocks. WNRL is growing fastly, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. WNRL is more undervalued relative to its price target. Finally, WNRL has better sentiment signals based on short interest.