Global

A Side-by-side Analysis of Transocean Ltd. (RIG) and BGC Partners, Inc. (BGCP)

Transocean Ltd. (NYSE:RIG) shares are up more than 28.37% this year and recently increased 0.81% or $0.11 to settle at $13.71. BGC Partners, Inc. (NASDAQ:BGCP), on the other hand, is down -18.86% year to date as of 05/17/2018. It currently trades at $12.26 and has returned -0.33% during the past week.

Transocean Ltd. (NYSE:RIG) and BGC Partners, Inc. (NASDAQ:BGCP) are the two most active stocks in the Oil & Gas Drilling & Exploration industry 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.

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. Comparatively, BGCP is expected to grow at a 12.50% annual rate. All else equal, BGCP’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. EBITDA margin of 17.47% for BGC Partners, Inc. (BGCP). RIG’s ROI is -12.60% while BGCP has a ROI of -0.20%. The interpretation is that BGCP’s business generates a higher return on investment than RIG’s.

Cash Flow



The amount of free cash flow available to investors is ultimately what determines the value of a stock. RIG’s free cash flow (“FCF”) per share for the trailing twelve months was +0.11. Comparatively, BGCP’s free cash flow per share was -1.78. On a percent-of-sales basis, RIG’s free cash flow was 1.71% while BGCP converted -16.26% of its revenues into cash flow. This means that, for a given level of sales, RIG is able to generate more free cash flow for investors.

Liquidity and Financial Risk

RIG’s debt-to-equity ratio is 0.73 versus a D/E of 2.86 for BGCP. BGCP is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

RIG trades at a P/B of 0.45, and a P/S of 2.23, compared to a forward P/E of 8.60, a P/B of 4.30, and a P/S of 1.19 for BGCP. 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

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. RIG is currently priced at a 10.21% to its one-year price target of 12.44. Comparatively, BGCP is -29.94% relative to its price target of 17.50. This suggests that BGCP is the better investment over the next year.

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. RIG has a beta of 1.47 and BGCP’s beta is 1.04. BGCP’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. RIG has a short ratio of 5.15 compared to a short interest of 1.30 for BGCP. This implies that the market is currently less bearish on the outlook for BGCP.

Summary




BGC Partners, Inc. (NASDAQ:BGCP) beats Transocean Ltd. (NYSE:RIG) on a total of 8 of the 14 factors compared between the two stocks. BGCP has higher cash flow per share, is more profitable and generates a higher return on investment. BGCP is more undervalued relative to its price target. Finally, BGCP has better sentiment signals based on short interest.

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