Earnings

Comparing Callon Petroleum Company (CPE) and Noble Energy, Inc. (NBL)

Callon Petroleum Company (NYSE:CPE) shares are down more than -33.25% this year and recently decreased -1.63% or -$0.17 to settle at $10.26. Noble Energy, Inc. (NYSE:NBL), on the other hand, is down -28.72% year to date as of 10/24/2017. It currently trades at $27.13 and has returned -2.20% during the past week.

Callon Petroleum Company (NYSE:CPE) and Noble Energy, Inc. (NYSE:NBL) 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.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Comparatively, NBL is expected to grow at a 3.75% annual rate. All else equal, NBL’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. Callon Petroleum Company (CPE) has an EBITDA margin of 39.91%. This suggests that CPE underlying business is more profitable CPE’s ROI is -2.80% while NBL has a ROI of -3.10%. The interpretation is that CPE’s business generates a higher return on investment than NBL’s.

Cash Flow 




Cash is king when it comes to investing. CPE’s free cash flow (“FCF”) per share for the trailing twelve months was -0.19. Comparatively, NBL’s free cash flow per share was -0.71. On a percent-of-sales basis, CPE’s free cash flow was -0.02% while NBL converted -9.89% of its revenues into cash flow. This means that, for a given level of sales, CPE 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. CPE has a current ratio of 1.40 compared to 1.00 for NBL. This means that CPE can more easily cover its most immediate liabilities over the next twelve months. CPE’s debt-to-equity ratio is 0.33 versus a D/E of 0.75 for NBL. NBL is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

CPE trades at a forward P/E of 14.45, a P/B of 1.14, and a P/S of 7.14, compared to a forward P/E of 1595.88, a P/B of 1.33, and a P/S of 3.24 for NBL. 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

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. CPE is currently priced at a -33.98% to its one-year price target of 15.54. Comparatively, NBL is -23.23% relative to its price target of 35.34. This suggests that CPE 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 CPE and 2.10 for NBL, which implies that analysts are more bullish on the outlook for NBL.

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. CPE has a beta of 1.37 and NBL’s beta is 1.18. NBL’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. CPE has a short ratio of 9.75 compared to a short interest of 3.87 for NBL. This implies that the market is currently less bearish on the outlook for NBL.

Summary

Callon Petroleum Company (NYSE:CPE) beats Noble Energy, Inc. (NYSE:NBL) on a total of 10 of the 14 factors compared between the two stocks. CPE is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, CPE is the cheaper of the two stocks on an earnings and book value, CPE is more undervalued relative to its price target. Finally, DVN has better sentiment signals based on short interest.

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