Earnings

Comparing Range Resources Corporation (RRC) and Cabot Oil & Gas Corporation (COG)

Range Resources Corporation (NYSE:RRC) shares are down more than -1.64% this year and recently decreased -4.55% or -$0.8 to settle at $16.78. Cabot Oil & Gas Corporation (NYSE:COG), on the other hand, is down -1.99% year to date as of 01/16/2018. It currently trades at $28.03 and has returned -3.04% during the past week.

Range Resources Corporation (NYSE:RRC) and Cabot Oil & Gas Corporation (NYSE:COG) 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.

Growth

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. Comparatively, COG is expected to grow at a 41.20% annual rate. All else equal, COG’s higher growth rate would imply a greater potential for capital appreciation.



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. , compared to an EBITDA margin of 25.04% for Cabot Oil & Gas Corporation (COG). RRC’s ROI is -0.90% while COG has a ROI of -8.00%. The interpretation is that RRC’s business generates a higher return on investment than COG’s.

Cash Flow 




Earnings don’t always accurately reflect the amount of cash that a company brings in. RRC’s free cash flow (“FCF”) per share for the trailing twelve months was -0.52. Comparatively, COG’s free cash flow per share was -0.06. On a percent-of-sales basis, RRC’s free cash flow was -11.74% while COG converted -2.4% 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

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. RRC has a current ratio of 0.50 compared to 1.60 for COG. This means that COG can more easily cover its most immediate liabilities over the next twelve months. RRC’s debt-to-equity ratio is 0.72 versus a D/E of 0.58 for COG. RRC is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

RRC trades at a forward P/E of 24.32, a P/B of 0.74, and a P/S of 1.92, compared to a forward P/E of 27.59, a P/B of 4.90, and a P/S of 7.76 for COG. RRC is the cheaper 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

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. RRC is currently priced at a -37.99% to its one-year price target of 27.06. Comparatively, COG is -10.02% relative to its price target of 31.15. This suggests that RRC 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 RRC and 2.30 for COG, which implies that analysts are more bullish on the outlook for COG.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. RRC has a beta of 0.89 and COG’s beta is 0.50. COG’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. RRC has a short ratio of 4.44 compared to a short interest of 3.62 for COG. This implies that the market is currently less bearish on the outlook for COG.

Summary

Cabot Oil & Gas Corporation (NYSE:COG) beats Range Resources Corporation (NYSE:RRC) on a total of 7 of the 14 factors compared between the two stocks. COG is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, RRC is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, COG has better sentiment signals based on short interest.

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