Forum Energy Technologies, Inc. (NYSE:FET) shares are down more than -26.37% this year and recently decreased -2.55% or -$0.3 to settle at $11.45. McDermott International, Inc. (NYSE:MDR), on the other hand, is up 16.72% year to date as of 02/12/2018. It currently trades at $7.68 and has returned -2.78% during the past week.
Forum Energy Technologies, Inc. (NYSE:FET) and McDermott International, Inc. (NYSE:MDR) are the two most active stocks in the Oil & Gas Equipment & Services 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.
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 FET to grow earnings at a 40.00% annual rate over the next 5 years. Comparatively, MDR is expected to grow at a 17.30% annual rate. All else equal, FET’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. EBITDA margin of 7.03% for McDermott International, Inc. (MDR). FET’s ROI is -4.50% while MDR has a ROI of 4.30%. The interpretation is that MDR’s business generates a higher return on investment than FET’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. FET’s free cash flow (“FCF”) per share for the trailing twelve months was -0.26. Comparatively, MDR’s free cash flow per share was +0.10. On a percent-of-sales basis, FET’s free cash flow was -0% while MDR converted 1.08% of its revenues into cash flow. This means that, for a given level of sales, MDR 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. FET has a current ratio of 3.70 compared to 1.70 for MDR. This means that FET can more easily cover its most immediate liabilities over the next twelve months. FET’s debt-to-equity ratio is 0.34 versus a D/E of 0.31 for MDR. FET is therefore the more solvent of the two companies, and has lower financial risk.
FET trades at a forward P/E of 21.77, a P/B of 0.94, and a P/S of 2.04, compared to a forward P/E of 17.49, a P/B of 1.26, and a P/S of 0.77 for MDR. FET is the cheaper of the two stocks on book value basis but is expensive in terms of P/E 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
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. FET is currently priced at a -30.69% to its one-year price target of 16.52. Comparatively, MDR is -18.99% relative to its price target of 9.48. This suggests that FET 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 2.70 for FET and 2.30 for MDR, which implies that analysts are more bullish on the outlook for FET.
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. FET has a beta of 1.72 and MDR’s beta is 1.54. MDR’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. FET has a short ratio of 6.73 compared to a short interest of 8.63 for MDR. This implies that the market is currently less bearish on the outlook for FET.
McDermott International, Inc. (NYSE:MDR) beats Forum Energy Technologies, Inc. (NYSE:FET) on a total of 9 of the 14 factors compared between the two stocks. MDR is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, MDR is the cheaper of the two stocks on an earnings and sales basis,