Energy Transfer Partners, L.P. (NYSE:ETP) shares are down more than -30.06% this year and recently increased 1.57% or $0.26 to settle at $16.80. Energy Transfer Equity, L.P. (NYSE:ETE), on the other hand, is down -13.41% year to date as of 11/13/2017. It currently trades at $16.72 and has returned -7.47% during the past week.
Energy Transfer Partners, L.P. (NYSE:ETP) and Energy Transfer Equity, L.P. (NYSE:ETE) are the two most active stocks in the Oil & Gas Pipelines 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.
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 ETP to grow earnings at a -0.60% annual rate over the next 5 years. Comparatively, ETE is expected to grow at a 13.00% annual rate. All else equal, ETE’s higher growth rate would imply a greater 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 12.14% for Energy Transfer Equity, L.P. (ETE). ETP’s ROI is 1.50% while ETE has a ROI of 4.30%. The interpretation is that ETE’s business generates a higher return on investment than ETP’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. ETP’s free cash flow (“FCF”) per share for the trailing twelve months was -2.11. Comparatively, ETE’s free cash flow per share was -1.38. On a percent-of-sales basis, ETP’s free cash flow was -26.64% while ETE converted -3.97% of its revenues into cash flow. This means that, for a given level of sales, ETE 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. ETP has a current ratio of 0.80 compared to 1.40 for ETE. This means that ETE can more easily cover its most immediate liabilities over the next twelve months.
ETP trades at a forward P/E of 16.85, a P/B of 0.72, and a P/S of 0.83, compared to a forward P/E of 7.62, and a P/S of 0.47 for ETE. ETP is the expensive of the two stocks on an earnings, book value and sales basis. 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. ETP is currently priced at a -34.2% to its one-year price target of 25.53. Comparatively, ETE is -18.8% relative to its price target of 20.59. This suggests that ETP 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 1.90 for ETP and 2.00 for ETE, which implies that analysts are more bullish on the outlook for ETE.
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. ETP has a beta of 1.01 and ETE’s beta is 1.92. ETP’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. ETP has a short ratio of 3.47 compared to a short interest of 10.99 for ETE. This implies that the market is currently less bearish on the outlook for ETP.
Energy Transfer Equity, L.P. (NYSE:ETE) beats Energy Transfer Partners, L.P. (NYSE:ETP) on a total of 9 of the 14 factors compared between the two stocks. ETE 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, ETE is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, GPK has better sentiment signals based on short interest.