Pioneer Natural Resources Company (NYSE:PXD) and Cimarex Energy Co. (NYSE:XEC) are the two most active stocks in the Independent Oil & Gas 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.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect PXD to grow earnings at a 15.00% annual rate over the next 5 years. Comparatively, XEC is expected to grow at a 63.70% annual rate. All else equal, XEC’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. Pioneer Natural Resources Company (PXD) has an EBITDA margin of 32.01%, compared to an EBITDA margin of 31.99% for Cimarex Energy Co. (XEC). This suggests that PXD underlying business is more profitable. PXD’s ROI is -1.60% while XEC has a ROI of -10.10%. The interpretation is that PXD’s business generates a higher return on investment than XEC’s.
The value of a stock is simply the present value of its future free cash flows. PXD’s free cash flow (“FCF”) per share for the trailing twelve months was -1.51. Comparatively, XEC’s free cash flow per share was -0.35. On a percent-of-sales basis, PXD’s free cash flow was -6.72% while XEC converted -2.65% of its revenues into cash flow. This means that, for a given level of sales, XEC 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. PXD has a current ratio of 2.00 compared to 1.80 for XEC. This means that PXD can more easily cover its most immediate liabilities over the next twelve months. PXD’s debt-to-equity ratio is 0.26 versus a D/E of 0.65 for XEC. XEC is therefore the more solvent of the two companies, and has lower financial risk.
PXD trades at a forward P/E of 50.70, a P/B of 2.05, and a P/S of 4.43, compared to a forward P/E of 19.30, a P/B of 4.01, and a P/S of 5.71 for XEC. 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. PXD is currently priced at a -35.19% to its one-year price target of $197.58. Comparatively, XEC is -22.71% relative to its price target of $128.36. This suggests that PXD 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 1.80 for PXD and 2.20 for XEC, which implies that analysts are more bullish on the outlook for XEC.
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. PXD has a beta of 1.00 and XEC’s beta is 1.33. PXD’s shares are therefore the less volatile of the two stocks.
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. PXD has a short ratio of 2.38 compared to a short interest of 1.16 for XEC. This implies that the market is currently less bearish on the outlook for XEC.
Pioneer Natural Resources Company (NYSE:PXD) beats Cimarex Energy Co. (NYSE:XEC) on a total of 9 of the 14 factors compared between the two stocks. PXD is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, PXD is the cheaper of the two stocks on book value and sales basis, PXD is more undervalued relative to its price target. Finally, VEEV has better sentiment signals based on short interest.