Helmerich & Payne, Inc. (NYSE:HP) shares are down more than -27.16% this year and recently decreased -3.04% or -$1.77 to settle at $56.38. Concho Resources Inc. (NYSE:CXO), on the other hand, is up 7.40% year to date as of 11/13/2017. It currently trades at $142.41 and has returned -2.87% during the past week.
Helmerich & Payne, Inc. (NYSE:HP) and Concho Resources Inc. (NYSE:CXO) are the two most active stocks in the Oil & Gas Drilling & Exploration 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.
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. Analysts expect HP to grow earnings at a 12.00% annual rate over the next 5 years. Comparatively, CXO is expected to grow at a 20.00% annual rate. All else equal, CXO’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 92.38% for Concho Resources Inc. (CXO). HP’s ROI is -0.10% while CXO has a ROI of -12.10%. The interpretation is that HP’s business generates a higher return on investment than CXO’s.
The value of a stock is simply the present value of its future free cash flows. HP’s free cash flow (“FCF”) per share for the trailing twelve months was -1.03. Comparatively, CXO’s free cash flow per share was -4.87. On a percent-of-sales basis, HP’s free cash flow was -6.89% while CXO converted -44.27% of its revenues into cash flow. This means that, for a given level of sales, HP 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. HP has a current ratio of 3.70 compared to 0.70 for CXO. This means that HP can more easily cover its most immediate liabilities over the next twelve months. HP’s debt-to-equity ratio is 0.00 versus a D/E of 0.33 for CXO. CXO is therefore the more solvent of the two companies, and has lower financial risk.
HP trades at a P/B of 1.44, and a P/S of 3.91, compared to a forward P/E of 63.69, a P/B of 2.43, and a P/S of 9.16 for CXO. HP 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. HP is currently priced at a 12.85% to its one-year price target of 49.96. Comparatively, CXO is -7.13% relative to its price target of 153.34. This suggests that CXO 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 3.30 for HP and 1.80 for CXO, which implies that analysts are more bullish on the outlook for HP.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. HP has a beta of 1.26 and CXO’s beta is 1.08. CXO’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. HP has a short ratio of 12.18 compared to a short interest of 5.57 for CXO. This implies that the market is currently less bearish on the outlook for CXO.
Helmerich & Payne, Inc. (NYSE:HP) beats Concho Resources Inc. (NYSE:CXO) on a total of 8 of the 14 factors compared between the two stocks. HP generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, HP is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, FTK has better sentiment signals based on short interest.