Cabot Oil & Gas Corporation (NYSE:COG) shares are up more than 1.50% this year and recently increased 0.45% or $0.13 to settle at $29.03. Pioneer Natural Resources Company (NYSE:PXD), on the other hand, is up 2.02% year to date as of 01/02/2018. It currently trades at $176.34 and has returned 1.35% during the past week.
Cabot Oil & Gas Corporation (NYSE:COG) and Pioneer Natural Resources Company (NYSE:PXD) are the two most active stocks in the Independent Oil & Gas 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 COG to grow earnings at a 41.20% annual rate over the next 5 years. Comparatively, PXD is expected to grow at a -3.60% annual rate. All else equal, COG’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. 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 30.1% for Pioneer Natural Resources Company (PXD). COG’s ROI is -8.00% while PXD has a ROI of -1.60%. The interpretation is that PXD’s business generates a higher return on investment than COG’s.
If there’s one thing investors care more about than earnings, it’s cash flow. COG’s free cash flow (“FCF”) per share for the trailing twelve months was -0.06. Comparatively, PXD’s free cash flow per share was -1.46. On a percent-of-sales basis, COG’s free cash flow was -2.4% while PXD converted -6.5% of its revenues into cash flow. This means that, for a given level of sales, COG is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. COG has a current ratio of 1.60 compared to 1.70 for PXD. This means that PXD can more easily cover its most immediate liabilities over the next twelve months. COG’s debt-to-equity ratio is 0.58 versus a D/E of 0.26 for PXD. COG is therefore the more solvent of the two companies, and has lower financial risk.
COG trades at a forward P/E of 29.59, a P/B of 5.08, and a P/S of 7.97, compared to a forward P/E of 51.31, a P/B of 2.83, and a P/S of 5.57 for PXD. COG is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B 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. COG is currently priced at a -7.31% to its one-year price target of 31.32. Comparatively, PXD is -6.57% relative to its price target of 188.75. This suggests that COG 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 COG and 1.80 for PXD, which implies that analysts are more bullish on the outlook for COG.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. COG has a beta of 0.53 and PXD’s beta is 0.99. COG’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.COG has a short ratio of 3.70 compared to a short interest of 3.01 for PXD. This implies that the market is currently less bearish on the outlook for PXD.
Pioneer Natural Resources Company (NYSE:PXD) beats Cabot Oil & Gas Corporation (NYSE:COG) on a total of 8 of the 14 factors compared between the two stocks. PXD is growing fastly, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, PXD is the cheaper of the two stocks on book value and sales basis, Finally, PXD has better sentiment signals based on short interest.