Rowan Companies plc (NYSE:RDC) shares are down more than -22.23% this year and recently decreased -3.67% or -$0.56 to settle at $14.69. Diamond Offshore Drilling, Inc. (NYSE:DO), on the other hand, is down -6.10% year to date as of 11/13/2017. It currently trades at $16.62 and has returned -1.54% during the past week.
Rowan Companies plc (NYSE:RDC) and Diamond Offshore Drilling, Inc. (NYSE:DO) 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 increase earnings at a high compound rate over time are attractive to investors. Analysts expect RDC to grow earnings at a -4.40% annual rate over the next 5 years.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. 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 38.5% for Diamond Offshore Drilling, Inc. (DO). RDC’s ROI is 6.20% while DO has a ROI of -4.50%. The interpretation is that RDC’s business generates a higher return on investment than DO’s.
If there’s one thing investors care more about than earnings, it’s cash flow. RDC’s free cash flow (“FCF”) per share for the trailing twelve months was +0.64. Comparatively, DO’s free cash flow per share was +1.17. On a percent-of-sales basis, RDC’s free cash flow was 4.38% while DO converted 10.03% of its revenues into cash flow. This means that, for a given level of sales, DO is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. RDC has a current ratio of 5.80 compared to 3.60 for DO. This means that RDC can more easily cover its most immediate liabilities over the next twelve months. RDC’s debt-to-equity ratio is 0.47 versus a D/E of 0.52 for DO. DO is therefore the more solvent of the two companies, and has lower financial risk.
RDC trades at a P/B of 0.35, and a P/S of 1.40, compared to a forward P/E of 86.56, a P/B of 0.60, and a P/S of 1.50 for DO. RDC 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”. RDC is currently priced at a 1.38% to its one-year price target of 14.49. Comparatively, DO is 20.17% relative to its price target of 13.83. This suggests that RDC 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 2.70 for RDC and 3.30 for DO, which implies that analysts are more bullish on the outlook for DO.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. RDC has a beta of 1.90 and DO’s beta is 1.29. DO’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. RDC has a short ratio of 5.95 compared to a short interest of 12.09 for DO. This implies that the market is currently less bearish on the outlook for RDC.
Rowan Companies plc (NYSE:RDC) beats Diamond Offshore Drilling, Inc. (NYSE:DO) on a total of 10 of the 14 factors compared between the two stocks. RDC is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, RDC is the cheaper of the two stocks on an earnings, book value and sales basis, RDC is more undervalued relative to its price target. Finally, RDC has better sentiment signals based on short interest.