Earnings

Dissecting the Numbers for Plains All American Pipeline, L.P. (PAA) and Cheniere Energy, Inc. (LNG)

Plains All American Pipeline, L.P. (NYSE:PAA) shares are down more than -36.95% this year and recently decreased -3.46% or -$0.73 to settle at $20.36. Cheniere Energy, Inc. (NYSE:LNG), on the other hand, is up 18.95% year to date as of 11/13/2017. It currently trades at $49.28 and has returned -2.13% during the past week.

Plains All American Pipeline, L.P. (NYSE:PAA) and Cheniere Energy, Inc. (NYSE:LNG) 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.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Comparatively, LNG is expected to grow at a -0.55% annual rate. All else equal, PAA’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 34.44% for Cheniere Energy, Inc. (LNG). PAA’s ROI is 5.10% while LNG has a ROI of -0.80%. The interpretation is that PAA’s business generates a higher return on investment than LNG’s.

Cash Flow 




The amount of free cash flow available to investors is ultimately what determines the value of a stock. PAA’s free cash flow (“FCF”) per share for the trailing twelve months was -0.23. Comparatively, LNG’s free cash flow per share was -0.89. On a percent-of-sales basis, PAA’s free cash flow was -0.83% while LNG converted -16.48% of its revenues into cash flow. This means that, for a given level of sales, PAA 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. PAA has a current ratio of 1.00 compared to 3.00 for LNG. This means that LNG can more easily cover its most immediate liabilities over the next twelve months.

Valuation

PAA trades at a forward P/E of 13.13, a P/B of 1.69, and a P/S of 0.61, compared to a forward P/E of 34.90, and a P/S of 2.64 for LNG. 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

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. PAA is currently priced at a -15.66% to its one-year price target of 24.14. Comparatively, LNG is -12.11% relative to its price target of 56.07. This suggests that PAA 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 PAA and 1.80 for LNG, which implies that analysts are more bullish on the outlook for PAA.

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. PAA has a beta of 1.02 and LNG’s beta is 1.81. PAA’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.PAA has a short ratio of 4.00 compared to a short interest of 7.20 for LNG. This implies that the market is currently less bearish on the outlook for PAA.

Summary

Plains All American Pipeline, L.P. (NYSE:PAA) beats Cheniere Energy, Inc. (NYSE:LNG) on a total of 9 of the 14 factors compared between the two stocks. PAA is growing fastly, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, PAA is the cheaper of the two stocks on an earnings and sales basis, PAA is more undervalued relative to its price target. Finally, PAA has better sentiment signals based on short interest.

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