QEP Resources, Inc. (NYSE:QEP) and SemGroup Corporation (NYSE:SEMG) are the two most active stocks in the Oil & Gas Pipelines 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
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 Return on Investment (ROI) as measures of profitability and return. QEP’s ROI is -16.20% while SEMG has a ROI of 4.40%. The interpretation is that SEMG’s business generates a higher return on investment than QEP’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. QEP’s free cash flow (“FCF”) per share for the trailing twelve months was -0.68. Comparatively, SEMG’s free cash flow per share was -1.14. On a percent-of-sales basis, QEP’s free cash flow was -11.89% while SEMG converted -6.73% of its revenues into cash flow. This means that, for a given level of sales, SEMG is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. QEP has a current ratio of 0.80 compared to 1.20 for SEMG. This means that SEMG can more easily cover its most immediate liabilities over the next twelve months. QEP’s debt-to-equity ratio is 0.56 versus a D/E of 0.86 for SEMG. SEMG is therefore the more solvent of the two companies, and has lower financial risk.
QEP trades at a forward P/B of 0.48, and a P/S of 1.11, compared to a forward P/E of 13.88, a P/B of 1.10, and a P/S of 1.12 for SEMG. 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. QEP is currently priced at a -52.17% to its one-year price target of $15.24. Comparatively, SEMG is -31.99% relative to its price target of $34.70. This suggests that QEP is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.10 for QEP and 2.50 for SEMG, which implies that analysts are more bullish on the outlook for SEMG.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. QEP has a beta of 1.76 and SEMG’s beta is 2.04. QEP’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. QEP has a short ratio of 2.41 compared to a short interest of 5.19 for SEMG. This implies that the market is currently less bearish on the outlook for QEP.
QEP Resources, Inc. (NYSE:QEP) beats SemGroup Corporation (NYSE:SEMG) on a total of 8 of the 12 factors compared between the two stocks. QEP has higher cash flow per share and has lower financial risk. In terms of valuation, QEP is the cheaper of the two stocks on book value and sales basis, QEP is more undervalued relative to its price target. Finally, QEP has better sentiment signals based on short interest.