Earnings

Critical Comparison: ONEOK, Inc. (OKE) vs. New Jersey Resources Corporation (NJR)

ONEOK, Inc. (NYSE:OKE) shares are up more than 9.19% this year and recently increased 2.86% or $1.62 to settle at $58.36. New Jersey Resources Corporation (NYSE:NJR), on the other hand, is down -1.62% year to date as of 01/10/2018. It currently trades at $39.55 and has returned -0.13% during the past week.

ONEOK, Inc. (NYSE:OKE) and New Jersey Resources Corporation (NYSE:NJR) are the two most active stocks in the Gas Utilities industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect OKE to grow earnings at a 9.70% annual rate over the next 5 years. Comparatively, NJR is expected to grow at a 6.00% annual rate. All else equal, OKE’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 5.8% for New Jersey Resources Corporation (NJR). OKE’s ROI is 11.10% while NJR has a ROI of 5.60%. The interpretation is that OKE’s business generates a higher return on investment than NJR’s.

Cash Flow 




If there’s one thing investors care more about than earnings, it’s cash flow. OKE’s free cash flow (“FCF”) per share for the trailing twelve months was -0.31. Comparatively, NJR’s free cash flow per share was -0.83. On a percent-of-sales basis, OKE’s free cash flow was -1.35% while NJR converted -3.18% of its revenues into cash flow. This means that, for a given level of sales, OKE is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. OKE has a current ratio of 0.60 compared to 0.70 for NJR. This means that NJR can more easily cover its most immediate liabilities over the next twelve months. OKE’s debt-to-equity ratio is 1.76 versus a D/E of 1.16 for NJR. OKE is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

OKE trades at a forward P/E of 27.02, a P/B of 4.15, and a P/S of 2.03, compared to a forward P/E of 20.03, a P/B of 2.77, and a P/S of 1.52 for NJR. OKE 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

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. OKE is currently priced at a 1.09% to its one-year price target of 57.73. Comparatively, NJR is -12.11% relative to its price target of 45.00. This suggests that NJR 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 2.50 for OKE and 2.00 for NJR, which implies that analysts are more bullish on the outlook for OKE.

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. OKE has a beta of 1.26 and NJR’s beta is 0.42. NJR’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. OKE has a short ratio of 4.69 compared to a short interest of 5.05 for NJR. This implies that the market is currently less bearish on the outlook for OKE.

Summary

New Jersey Resources Corporation (NYSE:NJR) beats ONEOK, Inc. (NYSE:OKE) on a total of 8 of the 14 factors compared between the two stocks. NJR is growing fastly and has lower financial risk. In terms of valuation, NJR is the cheaper of the two stocks on an earnings, book value and sales basis, NJR is more undervalued relative to its price target. Finally, VMC has better sentiment signals based on short interest.

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