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Choosing Between Southwestern Energy Company (SWN) and Office Depot, Inc. (ODP)

Southwestern Energy Company (NYSE:SWN) shares are down more than -16.67% this year and recently increased 0.43% or $0.02 to settle at $4.65. Office Depot, Inc. (NASDAQ:ODP), on the other hand, is down -30.23% year to date as of 05/17/2018. It currently trades at $2.47 and has returned 7.39% during the past week.

Southwestern Energy Company (NYSE:SWN) and Office Depot, Inc. (NASDAQ:ODP) are the two most active stocks in the Independent Oil & Gas industry 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 9.99% annual rate over the next 5 years. Comparatively, ODP is expected to grow at a -6.90% 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 5.01% for Office Depot, Inc. (ODP). SWN’s ROI is 10.80% while ODP has a ROI of 3.10%. The interpretation is that SWN’s business generates a higher return on investment than ODP’s.

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. SWN’s free cash flow (“FCF”) per share for the trailing twelve months was +0.06. Comparatively, ODP’s free cash flow per share was +0.28. On a percent-of-sales basis, SWN’s free cash flow was 1.1% while ODP converted 1.53% of its revenues into cash flow. This means that, for a given level of sales, ODP 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 2.00 compared to 1.40 for ODP. This means that SWN can more easily cover its most immediate liabilities over the next twelve months. SWN’s debt-to-equity ratio is 0.00 versus a D/E of 0.83 for ODP. ODP is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

SWN trades at a forward P/E of 5.88, a P/B of 1.21, and a P/S of 0.83, compared to a forward P/E of 7.48, a P/B of 0.63, and a P/S of 0.13 for ODP. SWN is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B 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 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 -21.72% to its one-year price target of 5.94. Comparatively, ODP is -20.32% relative to its price target of 3.10. This suggests that SWN 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. SWN has a beta of 0.83 and ODP’s beta is 2.61. SWN’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 3.46 compared to a short interest of 3.75 for ODP. This implies that the market is currently less bearish on the outlook for SWN.

Summary

Southwestern Energy Company (NYSE:SWN) beats Office Depot, Inc. (NASDAQ:ODP) on a total of 9 of the 14 factors compared between the two stocks. SWN is growing fastly, is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. SWN is more undervalued relative to its price target. Finally, SWN has better sentiment signals based on short interest.

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