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A Side-by-side Analysis of Marathon Oil Corporation (MRO) and J. C. Penney Company, Inc. (JCP)

Marathon Oil Corporation (NYSE:MRO) shares are up more than 24.57% this year and recently increased 1.88% or $0.39 to settle at $21.09. J. C. Penney Company, Inc. (NYSE:JCP), on the other hand, is down -22.78% year to date as of 07/06/2018. It currently trades at $2.44 and has returned 1.67% during the past week.

Marathon Oil Corporation (NYSE:MRO) and J. C. Penney Company, Inc. (NYSE:JCP) 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.

Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 6.19% for J. C. Penney Company, Inc. (JCP). MRO’s ROI is -3.50% while JCP has a ROI of 2.40%. The interpretation is that JCP’s business generates a higher return on investment than MRO’s.

Cash Flow

The value of a stock is simply the present value of its future free cash flows. MRO’s free cash flow (“FCF”) per share for the trailing twelve months was -0.06. Comparatively, JCP’s free cash flow per share was -1.47. On a percent-of-sales basis, MRO’s free cash flow was -1.17% while JCP converted -3.69% of its revenues into cash flow. This means that, for a given level of sales, MRO is able to generate more free cash flow for investors.

Liquidity and Financial Risk



Balance sheet risk is one of the biggest factors to consider before investing. MRO has a current ratio of 1.50 compared to 1.70 for JCP. This means that JCP 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 3.35 for JCP. JCP is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

MRO trades at a forward P/E of 20.70, a P/B of 1.49, and a P/S of 3.55, compared to a forward P/E of 15.44, a P/B of 0.58, and a P/S of 0.06 for JCP. MRO 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

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. MRO is currently priced at a -7.98% to its one-year price target of 22.92. Comparatively, JCP is -26.51% relative to its price target of 3.32. This suggests that JCP 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. MRO has a beta of 2.41 and JCP’s beta is 0.82. JCP’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. MRO has a short ratio of 1.13 compared to a short interest of 7.63 for JCP. This implies that the market is currently less bearish on the outlook for MRO.

Summary




J. C. Penney Company, Inc. (NYSE:JCP) beats Marathon Oil Corporation (NYSE:MRO) on a total of 7 of the 14 factors compared between the two stocks. JCP is more profitable and higher liquidity. In terms of valuation, JCP is the cheaper of the two stocks on an earnings, book value and sales basis, JCP is more undervalued relative to its price target. Finally, ECA has better sentiment signals based on short interest.

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