Kinder Morgan, Inc. (NYSE:KMI) shares are down more than -15.69% this year and recently decreased -1.19% or -$0.21 to settle at $17.46. The Williams Companies, Inc. (NYSE:WMB), on the other hand, is down -9.34% year to date as of 11/13/2017. It currently trades at $28.23 and has returned -1.95% during the past week.
Kinder Morgan, Inc. (NYSE:KMI) and The Williams Companies, Inc. (NYSE:WMB) are the two most active stocks in the Oil & Gas Pipelines 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.
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 KMI to grow earnings at a 10.00% annual rate over the next 5 years. Comparatively, WMB is expected to grow at a 10.00% annual rate. All else equal, All else equal, the two stocks’ identical expected growth rates would imply a similar potential for capital appreciation..
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 42.43% for The Williams Companies, Inc. (WMB). KMI’s ROI is 2.70% while WMB has a ROI of 1.00%. The interpretation is that KMI’s business generates a higher return on investment than WMB’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. KMI’s free cash flow (“FCF”) per share for the trailing twelve months was -0.02. Comparatively, WMB’s free cash flow per share was -0.24. On a percent-of-sales basis, KMI’s free cash flow was -0.34% while WMB converted -2.65% of its revenues into cash flow. This means that, for a given level of sales, KMI is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. KMI has a current ratio of 0.40 compared to 1.00 for WMB. This means that WMB can more easily cover its most immediate liabilities over the next twelve months. KMI’s debt-to-equity ratio is 1.09 versus a D/E of 2.60 for WMB. WMB is therefore the more solvent of the two companies, and has lower financial risk.
KMI trades at a forward P/E of 24.73, a P/B of 1.11, and a P/S of 2.94, compared to a forward P/E of 29.68, a P/B of 2.88, and a P/S of 2.92 for WMB. 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. KMI is currently priced at a -25.7% to its one-year price target of 23.50. Comparatively, WMB is -17.41% relative to its price target of 34.18. This suggests that KMI 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 2.20 for KMI and 1.90 for WMB, which implies that analysts are more bullish on the outlook for KMI.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. KMI has a beta of 0.62 and WMB’s beta is 1.38. KMI’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. KMI has a short ratio of 5.26 compared to a short interest of 2.99 for WMB. This implies that the market is currently less bearish on the outlook for WMB.
Kinder Morgan, Inc. (NYSE:KMI) beats The Williams Companies, Inc. (NYSE:WMB) on a total of 9 of the 14 factors compared between the two stocks. KMI is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, KMI is the cheaper of the two stocks on an earnings and book value, KMI is more undervalued relative to its price target. Finally, GPK has better sentiment signals based on short interest.