Range Resources Corporation (NYSE:RRC) shares are down more than -8.62% this year and recently decreased -0.06% or -$0.01 to settle at $15.59. Steel Dynamics, Inc. (NASDAQ:STLD), on the other hand, is up 9.53% year to date as of 03/13/2018. It currently trades at $47.24 and has returned 0.57% during the past week.
Range Resources Corporation (NYSE:RRC) and Steel Dynamics, Inc. (NASDAQ:STLD) are the two most active stocks in the market based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect RRC to grow earnings at a 60.37% annual rate over the next 5 years. Comparatively, STLD is expected to grow at a 16.83% annual rate. All else equal, RRC’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 14.35% for Steel Dynamics, Inc. (STLD). RRC’s ROI is -0.40% while STLD has a ROI of 13.20%. The interpretation is that STLD’s business generates a higher return on investment than RRC’s.
Cash is king when it comes to investing. RRC’s free cash flow (“FCF”) per share for the trailing twelve months was -0.52. Comparatively, STLD’s free cash flow per share was +0.49. On a percent-of-sales basis, RRC’s free cash flow was -4.95% while STLD converted 1.21% of its revenues into cash flow. This means that, for a given level of sales, STLD is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. RRC has a current ratio of 0.60 compared to 4.00 for STLD. This means that STLD can more easily cover its most immediate liabilities over the next twelve months. RRC’s debt-to-equity ratio is 0.71 versus a D/E of 0.71 for STLD. RRC is therefore the more solvent of the two companies, and has lower financial risk.
RRC trades at a forward P/E of 13.63, a P/B of 0.66, and a P/S of 1.54, compared to a forward P/E of 11.54, a P/B of 3.34, and a P/S of 1.16 for STLD. RRC 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
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. RRC is currently priced at a -33% to its one-year price target of 23.27. Comparatively, STLD is -9.95% relative to its price target of 52.46. 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 2.30 for RRC and 2.00 for STLD, which implies that analysts are more bullish on the outlook for RRC.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. RRC has a beta of 0.67 and STLD’s beta is 1.30. RRC’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. RRC has a short ratio of 6.12 compared to a short interest of 2.38 for STLD. This implies that the market is currently less bearish on the outlook for STLD.
Steel Dynamics, Inc. (NASDAQ:STLD) beats Range Resources Corporation (NYSE:RRC) on a total of 9 of the 14 factors compared between the two stocks. STLD is growing fastly, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, STLD is the cheaper of the two stocks on an earnings and sales basis, Finally, STLD has better sentiment signals based on short interest.