Weatherford International plc (NYSE:WFT) shares are down more than -38.13% this year and recently decreased -1.53% or -$0.04 to settle at $2.58. NRG Energy, Inc. (NYSE:NRG), on the other hand, is up 6.39% year to date as of 03/16/2018. It currently trades at $30.30 and has returned 1.85% during the past week.
Weatherford International plc (NYSE:WFT) and NRG Energy, Inc. (NYSE:NRG) are the two most active stocks in the market based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect WFT to grow earnings at a 2.94% annual rate over the next 5 years. Comparatively, NRG is expected to grow at a 75.33% annual rate. All else equal, NRG’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. EBITDA margin of 4.58% for NRG Energy, Inc. (NRG). WFT’s ROI is -32.80% while NRG has a ROI of 7.30%. The interpretation is that NRG’s business generates a higher return on investment than WFT’s.
If there’s one thing investors care more about than earnings, it’s cash flow. WFT’s free cash flow (“FCF”) per share for the trailing twelve months was +0.02. Comparatively, NRG’s free cash flow per share was +0.69. On a percent-of-sales basis, WFT’s free cash flow was 0.35% while NRG converted 2.06% of its revenues into cash flow. This means that, for a given level of sales, NRG 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. WFT has a current ratio of 1.70 compared to 1.30 for NRG. This means that WFT can more easily cover its most immediate liabilities over the next twelve months.
WFT trades at a P/S of 0.46, compared to a forward P/E of 12.18, and a P/S of 0.92 for NRG. 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. WFT is currently priced at a -47.02% to its one-year price target of 4.87. Comparatively, NRG is -12.81% relative to its price target of 34.75. This suggests that WFT 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 WFT and 1.80 for NRG, which implies that analysts are more bullish on the outlook for WFT.
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. WFT has a beta of 2.33 and NRG’s beta is 1.08. NRG’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. WFT has a short ratio of 6.83 compared to a short interest of 2.92 for NRG. This implies that the market is currently less bearish on the outlook for NRG.
NRG Energy, Inc. (NYSE:NRG) beats Weatherford International plc (NYSE:WFT) on a total of 9 of the 13 factors compared between the two stocks. NRG higher liquidity, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. Finally, NRG has better sentiment signals based on short interest.