Centennial Resource Development, Inc. (NASDAQ:CDEV) shares are up more than 1.88% this year and recently decreased -0.54% or -$0.11 to settle at $20.09. Enbridge Energy Partners, L.P. (NYSE:EEP), on the other hand, is down -44.94% year to date as of 11/13/2017. It currently trades at $14.03 and has returned -4.30% during the past week.
Centennial Resource Development, Inc. (NASDAQ:CDEV) and Enbridge Energy Partners, L.P. (NYSE:EEP) 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.
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 CDEV to grow earnings at a -3.10% annual rate over the next 5 years. Comparatively, EEP is expected to grow at a 14.20% annual rate. All else equal, EEP’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., compared to an EBITDA margin of 46.86% for Enbridge Energy Partners, L.P. (EEP). CDEV’s ROI is -9.10% while EEP has a ROI of 2.90%. The interpretation is that EEP’s business generates a higher return on investment than CDEV’s.
If there’s one thing investors care more about than earnings, it’s cash flow. CDEV’s free cash flow (“FCF”) per share for the trailing twelve months was -0.52. Comparatively, EEP’s free cash flow per share was +0.09. On a percent-of-sales basis, CDEV’s free cash flow was -0.15% while EEP converted 0.66% of its revenues into cash flow. This means that, for a given level of sales, EEP 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. CDEV has a current ratio of 0.30 compared to 0.30 for EEP. This means that CDEV can more easily cover its most immediate liabilities over the next twelve months. CDEV’s debt-to-equity ratio is 0.00 versus a D/E of 4.27 for EEP. EEP is therefore the more solvent of the two companies, and has lower financial risk.
CDEV trades at a forward P/E of 42.65, a P/B of 1.65, and a P/S of 14.26, compared to a forward P/E of 14.26, a P/B of 3.48, and a P/S of 1.51 for EEP. CDEV is the cheaper of the two stocks on book value basis but is expensive in terms of P/E 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
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. CDEV is currently priced at a 158.89% to its one-year price target of 7.76. Comparatively, EEP is -22.06% relative to its price target of 18.00. This suggests that EEP is the better investment over the next year.
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. CDEV has a short ratio of 15.39 compared to a short interest of 6.26 for EEP. This implies that the market is currently less bearish on the outlook for EEP.
Enbridge Energy Partners, L.P. (NYSE:EEP) beats Centennial Resource Development, Inc. (NASDAQ:CDEV) on a total of 9 of the 14 factors compared between the two stocks. EEP higher liquidity, is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, EEP is the cheaper of the two stocks on an earnings and sales basis, EEP is more undervalued relative to its price target. Finally, EEP has better sentiment signals based on short interest.