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Critical Comparison: Baytex Energy Corp. (BTE) vs. Stryker Corporation (SYK)

Baytex Energy Corp. (NYSE:BTE) shares are down more than -35.33% this year and recently decreased -4.90% or -$0.1 to settle at $1.94. Stryker Corporation (NYSE:SYK), on the other hand, is up 11.24% year to date as of 12/04/2018. It currently trades at $172.25 and has returned 3.10% during the past week.

Baytex Energy Corp. (NYSE:BTE) and Stryker Corporation (NYSE:SYK) are the two most active stocks based on recent 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

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 BTE to grow earnings at a 18.20% annual rate over the next 5 years. Comparatively, SYK is expected to grow at a 10.28% annual rate. All else equal, BTE’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. EBITDA margin of 23.73% for Stryker Corporation (SYK). BTE’s ROI is -0.10% while SYK has a ROI of 12.10%. The interpretation is that SYK’s business generates a higher return on investment than BTE’s.

Cash Flow



The value of a stock is simply the present value of its future free cash flows. BTE’s free cash flow (“FCF”) per share for the trailing twelve months was +0.04. Comparatively, SYK’s free cash flow per share was +0.79. On a percent-of-sales basis, BTE’s free cash flow was 0% while SYK converted 2.38% of its revenues into cash flow. This means that, for a given level of sales, SYK is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios are important because they reveal the financial health of a company. BTE has a current ratio of 0.50 compared to 1.90 for SYK. This means that SYK can more easily cover its most immediate liabilities over the next twelve months. BTE’s debt-to-equity ratio is 0.64 versus a D/E of 0.73 for SYK. SYK is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

BTE trades at a forward P/E of 7.43, a P/B of 0.31, and a P/S of 1.36, compared to a forward P/E of 21.54, a P/B of 6.53, and a P/S of 4.73 for SYK. BTE 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

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. BTE is currently priced at a -50.76% to its one-year price target of 3.94. Comparatively, SYK is -7.96% relative to its price target of 187.15. This suggests that BTE 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. BTE has a beta of 3.24 and SYK’s beta is 0.66. SYK’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. BTE has a short ratio of 3.63 compared to a short interest of 3.14 for SYK. This implies that the market is currently less bearish on the outlook for SYK.

Summary

Stryker Corporation (NYSE:SYK) beats Baytex Energy Corp. (NYSE:BTE) on a total of 8 of the 14 factors compared between the two stocks. SYK is growing fastly, 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, BTE is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, SYK has better sentiment signals based on short interest.

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