Earnings

Critical Comparison: Helix Energy Solutions Group, Inc. (HLX) vs. NOW Inc. (DNOW)

Helix Energy Solutions Group, Inc. (NYSE:HLX) shares are down more than -22.11% this year and recently decreased -5.24% or -$0.38 to settle at $6.87. NOW Inc. (NYSE:DNOW), on the other hand, is down -47.24% year to date as of 11/13/2017. It currently trades at $10.80 and has returned -5.43% during the past week.

Helix Energy Solutions Group, Inc. (NYSE:HLX) and NOW Inc. (NYSE:DNOW) are the two most active stocks in the Oil & Gas Equipment & Services industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

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 HLX to grow earnings at a 43.00% annual rate over the next 5 years.



Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. Helix Energy Solutions Group, Inc. (HLX) has an EBITDA margin of 9.03%. This suggests that HLX underlying business is more profitable HLX’s ROI is -2.80% while DNOW has a ROI of -18.10%. The interpretation is that HLX’s business generates a higher return on investment than DNOW’s.

Cash Flow 




If there’s one thing investors care more about than earnings, it’s cash flow. HLX’s free cash flow (“FCF”) per share for the trailing twelve months was -0.15. Comparatively, DNOW’s free cash flow per share was -0.32. On a percent-of-sales basis, HLX’s free cash flow was -0% while DNOW converted -1.64% of its revenues into cash flow. This means that, for a given level of sales, HLX 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. HLX has a current ratio of 2.00 compared to 2.70 for DNOW. This means that DNOW can more easily cover its most immediate liabilities over the next twelve months. HLX’s debt-to-equity ratio is 0.33 versus a D/E of 0.14 for DNOW. HLX is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

HLX trades at a forward P/E of 36.54, a P/B of 0.66, and a P/S of 1.91, compared to a forward P/E of 77.70, a P/B of 0.98, and a P/S of 0.47 for DNOW. 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

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. HLX is currently priced at a -27.84% to its one-year price target of 9.52. Comparatively, DNOW is -22.86% relative to its price target of 14.00. This suggests that HLX 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 2.10 for HLX and 2.60 for DNOW, which implies that analysts are more bullish on the outlook for DNOW.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. HLX has a beta of 2.63 and DNOW’s beta is 0.90. DNOW’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. HLX has a short ratio of 3.04 compared to a short interest of 8.03 for DNOW. This implies that the market is currently less bearish on the outlook for HLX.

Summary

Helix Energy Solutions Group, Inc. (NYSE:HLX) beats NOW Inc. (NYSE:DNOW) on a total of 10 of the 14 factors compared between the two stocks. HLX is growing fastly, 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, HLX is the cheaper of the two stocks on an earnings and book value, HLX is more undervalued relative to its price target. Finally, HLX has better sentiment signals based on short interest.

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