RSP Permian, Inc. (NYSE:RSPP) shares are up more than 17.53% this year and recently increased 1.40% or $0.66 to settle at $47.81. Hess Corporation (NYSE:HES), on the other hand, is up 18.47% year to date as of 04/16/2018. It currently trades at $56.24 and has returned 8.99% during the past week.
RSP Permian, Inc. (NYSE:RSPP) and Hess Corporation (NYSE:HES) are the two most active stocks in the Oil & Gas Drilling & Exploration industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider 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. Analysts expect RSPP to grow earnings at a 56.93% annual rate over the next 5 years. Comparatively, HES is expected to grow at a 5.00% annual rate. All else equal, RSPP’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. RSP Permian, Inc. (RSPP) has an EBITDA margin of 59.83%. This suggests that RSPP underlying business is more profitable RSPP’s ROI is 8.50% while HES has a ROI of -19.60%. The interpretation is that RSPP’s business generates a higher return on investment than HES’s.Cash Flow
Cash is king when it comes to investing. RSPP’s free cash flow (“FCF”) per share for the trailing twelve months was -0.25. Comparatively, HES’s free cash flow per share was -0.96. On a percent-of-sales basis, RSPP’s free cash flow was -0% while HES converted -5.53% of its revenues into cash flow. This means that, for a given level of sales, RSPP is able to generate more free cash flow for investors.Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. RSPP has a current ratio of 0.70 compared to 2.50 for HES. This means that HES can more easily cover its most immediate liabilities over the next twelve months. RSPP’s debt-to-equity ratio is 0.35 versus a D/E of 0.63 for HES. HES is therefore the more solvent of the two companies, and has lower financial risk.Valuation
RSPP trades at a forward P/E of 15.95, a P/B of 1.74, and a P/S of 9.15, compared to a P/B of 1.60, and a P/S of 3.15 for HES. RSPP is the expensive 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. RSPP is currently priced at a -9.3% to its one-year price target of 52.71. Comparatively, HES is 1.33% relative to its price target of 55.50. This suggests that RSPP is the better investment over the next year.
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. RSPP has a beta of 1.67 and HES’s beta is 1.46. HES’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. RSPP has a short ratio of 1.73 compared to a short interest of 6.15 for HES. This implies that the market is currently less bearish on the outlook for RSPP.Summary
RSP Permian, Inc. (NYSE:RSPP) beats Hess Corporation (NYSE:HES) on a total of 9 of the 14 factors compared between the two stocks. RSPP is growing fastly, 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. RSPP is more undervalued relative to its price target. Finally, RSPP has better sentiment signals based on short interest.