Earnings

Baker Hughes, a GE company (BHGE) vs. TechnipFMC plc (FTI): Which is the Better Investment?

Baker Hughes, a GE company (NYSE:BHGE) shares are down more than -29.56% this year and recently decreased -3.25% or -$1.07 to settle at $31.88. TechnipFMC plc (NYSE:FTI), on the other hand, is down -19.66% year to date as of 11/13/2017. It currently trades at $28.40 and has returned -3.24% during the past week.

Baker Hughes, a GE company (NYSE:BHGE) and TechnipFMC plc (NYSE:FTI) are the two most active stocks in the Oil & Gas Equipment & Services industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

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 BHGE to grow earnings at a 2.40% annual rate over the next 5 years. Comparatively, FTI is expected to grow at a -8.95% annual rate. All else equal, BHGE’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 6.54% for TechnipFMC plc (FTI).

Cash Flow 




If there’s one thing investors care more about than earnings, it’s cash flow. BHGE’s free cash flow (“FCF”) per share for the trailing twelve months was -1.14. Comparatively, FTI’s free cash flow per share was -0.17. On a percent-of-sales basis, BHGE’s free cash flow was -4.96% while FTI converted -1.75% of its revenues into cash flow. This means that, for a given level of sales, FTI 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. BHGE has a current ratio of 1.90 compared to 1.20 for FTI. This means that BHGE can more easily cover its most immediate liabilities over the next twelve months. BHGE’s debt-to-equity ratio is 0.12 versus a D/E of 0.27 for FTI. FTI is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

BHGE trades at a forward P/E of 29.17, a P/B of 0.34, and a P/S of 2.61, compared to a forward P/E of 22.10, a P/B of 0.97, and a P/S of 1.13 for FTI. BHGE is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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. BHGE is currently priced at a -16.81% to its one-year price target of 38.32. Comparatively, FTI is -20.91% relative to its price target of 35.91. This suggests that FTI 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 2.60 for BHGE and 2.60 for FTI, which implies that analysts are equally bullish on their outlook for 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. BHGE has a short ratio of 1.46 compared to a short interest of 3.33 for FTI. This implies that the market is currently less bearish on the outlook for BHGE.

Summary

TechnipFMC plc (NYSE:FTI) beats Baker Hughes, a GE company (NYSE:BHGE) on a total of 8 of the 14 factors compared between the two stocks. FTI is growing fastly, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, FTI is the cheaper of the two stocks on an earnings and sales basis, FTI is more undervalued relative to its price target. Finally, HAL has better sentiment signals based on short interest.

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