Devon Energy Corporation (NYSE:DVN) shares are down more than -1.26% this year and recently decreased -2.55% or -$1.07 to settle at $40.88. Red Hat, Inc. (NYSE:RHT), on the other hand, is up 22.28% year to date as of 09/13/2018. It currently trades at $146.86 and has returned 0.64% during the past week.
Devon Energy Corporation (NYSE:DVN) and Red Hat, Inc. (NYSE:RHT) are the two most active stocks in the Independent Oil & Gas industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.Growth
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect DVN to grow earnings at a 78.71% annual rate over the next 5 years. Comparatively, RHT is expected to grow at a 16.92% annual rate. All else equal, DVN’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 21.3% for Red Hat, Inc. (RHT). DVN’s ROI is 9.50% while RHT has a ROI of 16.90%. The interpretation is that RHT’s business generates a higher return on investment than DVN’s.Cash Flow
If there’s one thing investors care more about than earnings, it’s cash flow. DVN’s free cash flow (“FCF”) per share for the trailing twelve months was -0.77. Comparatively, RHT’s free cash flow per share was +1.75. On a percent-of-sales basis, DVN’s free cash flow was -2.81% while RHT converted 10.63% of its revenues into cash flow. This means that, for a given level of sales, RHT 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. DVN has a current ratio of 1.60 compared to 1.30 for RHT. This means that DVN can more easily cover its most immediate liabilities over the next twelve months. DVN’s debt-to-equity ratio is 0.76 versus a D/E of 0.52 for RHT. DVN is therefore the more solvent of the two companies, and has lower financial risk.Valuation
DVN trades at a forward P/E of 15.43, a P/B of 2.63, and a P/S of 1.80, compared to a forward P/E of 37.04, a P/B of 18.18, and a P/S of 8.52 for RHT. DVN 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
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. DVN is currently priced at a -19.98% to its one-year price target of 51.09. Comparatively, RHT is -10.82% relative to its price target of 164.67. This suggests that DVN 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. DVN has a beta of 2.28 and RHT’s beta is 1.13. RHT’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. DVN has a short ratio of 4.31 compared to a short interest of 3.03 for RHT. This implies that the market is currently less bearish on the outlook for RHT.Summary
Red Hat, Inc. (NYSE:RHT) beats Devon Energy Corporation (NYSE:DVN) on a total of 7 of the 14 factors compared between the two stocks. RHT is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, DVN is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, RHT has better sentiment signals based on short interest.