Earnings

Southwestern Energy Company (SWN) vs. Target Corporation (TGT): Breaking Down the Independent Oil & Gas Industry’s Two Hottest Stocks

Southwestern Energy Company (NYSE:SWN) shares are down more than -34.23% this year and recently increased 3.38% or $0.12 to settle at $3.67. Target Corporation (NYSE:TGT), on the other hand, is up 15.48% year to date as of 02/14/2018. It currently trades at $75.35 and has returned 2.87% during the past week.

Southwestern Energy Company (NYSE:SWN) and Target Corporation (NYSE:TGT) are the two most active stocks in the market 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 grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect SWN to grow earnings at a 9.00% annual rate over the next 5 years. Comparatively, TGT is expected to grow at a -1.38% annual rate. All else equal, SWN’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 9.89% for Target Corporation (TGT). SWN’s ROI is -39.80% while TGT has a ROI of 15.50%. The interpretation is that TGT’s business generates a higher return on investment than SWN’s.

Cash Flow 




The value of a stock is simply the present value of its future free cash flows. SWN’s free cash flow (“FCF”) per share for the trailing twelve months was -0.24. Comparatively, TGT’s free cash flow per share was +0.70. On a percent-of-sales basis, SWN’s free cash flow was -5.78% while TGT converted 0.55% of its revenues into cash flow. This means that, for a given level of sales, TGT 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. SWN has a current ratio of 1.90 compared to 1.00 for TGT. This means that SWN can more easily cover its most immediate liabilities over the next twelve months. SWN’s debt-to-equity ratio is 2.69 versus a D/E of 1.13 for TGT. SWN is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

SWN trades at a forward P/E of 4.72, a P/B of 1.11, and a P/S of 0.60, compared to a forward P/E of 14.35, a P/B of 3.68, and a P/S of 0.59 for TGT. 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 isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. SWN is currently priced at a -48.89% to its one-year price target of 7.18. Comparatively, TGT is 1.14% relative to its price target of 74.50. This suggests that SWN 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 2.80 for SWN and 2.90 for TGT, which implies that analysts are more bullish on the outlook for TGT.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. SWN has a beta of 1.02 and TGT’s beta is 0.72. TGT’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. SWN has a short ratio of 1.68 compared to a short interest of 5.46 for TGT. This implies that the market is currently less bearish on the outlook for SWN.

Summary

Southwestern Energy Company (NYSE:SWN) beats Target Corporation (NYSE:TGT) on a total of 8 of the 14 factors compared between the two stocks. SWN is growing fastly, is more profitable and higher liquidity. In terms of valuation, SWN is the cheaper of the two stocks on an earnings and book value, SWN is more undervalued relative to its price target. Finally, SWN has better sentiment signals based on short interest.

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