Marathon Oil Corporation (NYSE:MRO) shares are up more than 27.88% this year and recently increased 2.22% or $0.47 to settle at $21.65. Canadian Natural Resources Limited (NYSE:CNQ), on the other hand, is up 4.98% year to date as of 05/17/2018. It currently trades at $37.50 and has returned 3.51% during the past week.
Marathon Oil Corporation (NYSE:MRO) and Canadian Natural Resources Limited (NYSE:CNQ) are the two most active stocks in the Independent Oil & Gas industry 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.Growth
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Comparatively, CNQ is expected to grow at a 9.43% annual rate. All else equal, CNQ’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. Marathon Oil Corporation (MRO) has an EBITDA margin of 45.93%. This suggests that MRO underlying business is more profitable MRO’s ROI is -3.50% while CNQ has a ROI of 3.40%. The interpretation is that CNQ’s business generates a higher return on investment than MRO’s.Cash Flow
Earnings don’t always accurately reflect the amount of cash that a company brings in. MRO’s free cash flow (“FCF”) per share for the trailing twelve months was -0.06. Comparatively, CNQ’s free cash flow per share was +0.96. On a percent-of-sales basis, MRO’s free cash flow was -1.17% while CNQ converted 9.16% of its revenues into cash flow. This means that, for a given level of sales, CNQ 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. MRO has a current ratio of 1.50 compared to 1.00 for CNQ. This means that MRO can more easily cover its most immediate liabilities over the next twelve months. MRO’s debt-to-equity ratio is 0.00 versus a D/E of 0.69 for CNQ. CNQ is therefore the more solvent of the two companies, and has lower financial risk.Valuation
MRO trades at a forward P/E of 27.34, a P/B of 1.53, and a P/S of 3.59, compared to a forward P/E of 18.09, a P/B of 1.83, and a P/S of 3.15 for CNQ. MRO is the cheaper of the two stocks on book value basis but is expensive in terms of P/E 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
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. MRO is currently priced at a 2.46% to its one-year price target of 21.13. Comparatively, CNQ is -7.95% relative to its price target of 40.74. This suggests that CNQ is the better investment over the next year.
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. MRO has a beta of 2.34 and CNQ’s beta is 1.34. CNQ’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. MRO has a short ratio of 1.08 compared to a short interest of 1.88 for CNQ. This implies that the market is currently less bearish on the outlook for MRO.Summary
Canadian Natural Resources Limited (NYSE:CNQ) beats Marathon Oil Corporation (NYSE:MRO) on a total of 9 of the 14 factors compared between the two stocks. CNQ 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, CNQ is the cheaper of the two stocks on an earnings and sales basis, CNQ is more undervalued relative to its price target. Finally, ECA has better sentiment signals based on short interest.