Encana Corporation (NYSE:ECA) shares are up more than 3.08% this year and recently increased 2.23% or $0.3 to settle at $13.74. Occidental Petroleum Corporation (NYSE:OXY), on the other hand, is up 16.97% year to date as of 05/17/2018. It currently trades at $86.16 and has returned 2.74% during the past week.
Encana Corporation (NYSE:ECA) and Occidental Petroleum Corporation (NYSE:OXY) are the two most active stocks in the Major Integrated Oil & Gas 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
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Comparatively, OXY is expected to grow at a 61.51% annual rate. All else equal, OXY’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., compared to an EBITDA margin of 46.06% for Occidental Petroleum Corporation (OXY). ECA’s ROI is 6.60% while OXY has a ROI of 2.20%. The interpretation is that ECA’s business generates a higher return on investment than OXY’s.Cash Flow
Cash is king when it comes to investing. ECA’s free cash flow (“FCF”) per share for the trailing twelve months was -0.18. Comparatively, OXY’s free cash flow per share was -0.80. On a percent-of-sales basis, ECA’s free cash flow was -3.9% while OXY converted -4.9% of its revenues into cash flow. This means that, for a given level of sales, ECA is able to generate more free cash flow for investors.Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. ECA has a current ratio of 1.20 compared to 1.30 for OXY. This means that OXY can more easily cover its most immediate liabilities over the next twelve months. ECA’s debt-to-equity ratio is 0.85 versus a D/E of 0.50 for OXY. ECA is therefore the more solvent of the two companies, and has lower financial risk.Valuation
ECA trades at a forward P/E of 14.43, a P/B of 1.97, and a P/S of 3.00, compared to a forward P/E of 23.91, a P/B of 3.18, and a P/S of 4.89 for OXY. ECA is the cheaper 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
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. ECA is currently priced at a -13.04% to its one-year price target of 15.80. Comparatively, OXY is 9.26% relative to its price target of 78.86. This suggests that ECA is the better investment over the next year.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. ECA has a beta of 2.03 and OXY’s beta is 0.66. OXY’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. ECA has a short ratio of 1.51 compared to a short interest of 1.94 for OXY. This implies that the market is currently less bearish on the outlook for ECA.Summary
Encana Corporation (NYSE:ECA) beats Occidental Petroleum Corporation (NYSE:OXY) on a total of 10 of the 14 factors compared between the two stocks. ECA is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, ECA is the cheaper of the two stocks on an earnings, book value and sales basis, ECA is more undervalued relative to its price target. Finally, ECA has better sentiment signals based on short interest.