Finance

Halcon Resources Corporation (HK) vs. Mallinckrodt Public Limited Company (MNK): Which is the Better Investment?

Halcon Resources Corporation (NYSE:HK) shares are down more than -47.82% this year and recently increased 4.77% or $0.18 to settle at $3.95. Mallinckrodt Public Limited Company (NYSE:MNK), on the other hand, is up 36.08% year to date as of 08/09/2018. It currently trades at $30.70 and has returned 31.82% during the past week.

Halcon Resources Corporation (NYSE:HK) and Mallinckrodt Public Limited Company (NYSE:MNK) are the two most active stocks in the Oil & Gas Drilling & Exploration industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

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, MNK is expected to grow at a 7.36% annual rate. All else equal, MNK’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., compared to an EBITDA margin of 29.85% for Mallinckrodt Public Limited Company (MNK). HK’s ROI is 59.80% while MNK has a ROI of 12.60%. The interpretation is that HK’s business generates a higher return on investment than MNK’s.

Cash Flow



Cash is king when it comes to investing. HK’s free cash flow (“FCF”) per share for the trailing twelve months was -1.82. Comparatively, MNK’s free cash flow per share was -0.19. On a percent-of-sales basis, HK’s free cash flow was -0.08% while MNK converted -0.49% of its revenues into cash flow. This means that, for a given level of sales, HK 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. HK has a current ratio of 0.90 compared to 2.10 for MNK. This means that MNK can more easily cover its most immediate liabilities over the next twelve months. HK’s debt-to-equity ratio is 0.00 versus a D/E of 1.05 for MNK. MNK is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

HK trades at a forward P/E of 11.86, a P/B of 0.56, and a P/S of 2.75, compared to a forward P/E of 4.38, a P/B of 0.41, and a P/S of 0.89 for MNK. HK 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. HK is currently priced at a -56.4% to its one-year price target of 9.06. Comparatively, MNK is 46.19% relative to its price target of 21.00. This suggests that HK 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. HK has a beta of 4.21 and MNK’s beta is 1.36. MNK’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. HK has a short ratio of 7.36 compared to a short interest of 9.79 for MNK. This implies that the market is currently less bearish on the outlook for HK.

Summary

Mallinckrodt Public Limited Company (NYSE:MNK) beats Halcon Resources Corporation (NYSE:HK) on a total of 7 of the 14 factors compared between the two stocks. MNK is more profitable, has higher cash flow per share and higher liquidity. In terms of valuation, MNK is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, KEY has better sentiment signals based on short interest.

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