Valvoline Inc. (NYSE:VVV) and Delek US Holdings, Inc. (NYSE:DK) 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. VVV’s ROI is 67.30% while DK has a ROI of -6.70%. The interpretation is that VVV’s business generates a higher return on investment than DK’s.
Cash is king when it comes to investing. VVV’s free cash flow (“FCF”) per share for the trailing twelve months was +0.30. Comparatively, DK’s free cash flow per share was -0.32. On a percent-of-sales basis, VVV’s free cash flow was 3.15% while DK converted -0.62% of its revenues into cash flow. This means that, for a given level of sales, VVV 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. VVV has a current ratio of 1.40 compared to 1.50 for DK. This means that DK can more easily cover its most immediate liabilities over the next twelve months.
VVV trades at a forward P/E of 15.45, a P/S of 2.18, compared to a forward P/E of 24.71, a P/B of 1.37, and a P/S of 0.38 for DK. VVV 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. VVV is currently priced at a -16.65% to its one-year price target of $25.89. Comparatively, DK is -23.87% relative to its price target of $28.07. This suggests that DK 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 VVV and 2.70 for DK, 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’s beta is 1.93.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. VVV has a short ratio of 4.23 compared to a short interest of 4.30 for DK. This implies that the market is currently less bearish on the outlook for VVV.
Valvoline Inc. (NYSE:VVV) beats Delek US Holdings, Inc. (NYSE:DK) on a total of 7 of the 10 factors compared between the two stocks. VVV is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. Finally, VVV has better sentiment signals based on short interest.