Eclipse Resources Corporation (NYSE:ECR) shares are down more than -47.50% this year and recently increased 1.61% or $0.02 to settle at $1.26. HighPoint Resources Corporation (NYSE:HPR), on the other hand, is up 2.14% year to date as of 09/11/2018. It currently trades at $5.24 and has returned -3.32% during the past week.
Eclipse Resources Corporation (NYSE:ECR) and HighPoint Resources Corporation (NYSE:HPR) 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 grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect ECR to grow earnings at a 25.90% annual rate over the next 5 years. Comparatively, HPR is expected to grow at a 31.00% annual rate. All else equal, HPR’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 24.71% for HighPoint Resources Corporation (HPR). ECR’s ROI is 1.20% while HPR has a ROI of -6.00%. The interpretation is that ECR’s business generates a higher return on investment than HPR’s.Cash Flow
Earnings don’t always accurately reflect the amount of cash that a company brings in. ECR’s free cash flow (“FCF”) per share for the trailing twelve months was +0.38. Comparatively, HPR’s free cash flow per share was -0.63. On a percent-of-sales basis, ECR’s free cash flow was 0.03% while HPR converted -0.05% of its revenues into cash flow. This means that, for a given level of sales, ECR 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. ECR has a current ratio of 0.70 compared to 0.70 for HPR. This means that ECR can more easily cover its most immediate liabilities over the next twelve months. ECR’s debt-to-equity ratio is 0.86 versus a D/E of 0.61 for HPR. ECR is therefore the more solvent of the two companies, and has lower financial risk.Valuation
ECR trades at a forward P/E of 17.26, a P/B of 0.59, and a P/S of 0.92, compared to a forward P/E of 7.34, a P/B of 1.08, and a P/S of 3.24 for HPR. 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. ECR is currently priced at a -46.61% to its one-year price target of 2.36. Comparatively, HPR is -37.4% relative to its price target of 8.37. This suggests that ECR 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. ECR has a beta of 2.81 and HPR’s beta is 3.27. ECR’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. ECR has a short ratio of 4.87 compared to a short interest of 6.02 for HPR. This implies that the market is currently less bearish on the outlook for ECR.Summary
Eclipse Resources Corporation (NYSE:ECR) beats HighPoint Resources Corporation (NYSE:HPR) on a total of 9 of the 14 factors compared between the two stocks. ECR generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, ECR is the cheaper of the two stocks on book value and sales basis, ECR is more undervalued relative to its price target. Finally, ECR has better sentiment signals based on short interest.