Halcon Resources Corporation (NYSE:HK) shares are down more than -24.09% this year and recently increased 4.57% or $0.31 to settle at $7.09. Unit Corporation (NYSE:UNT), on the other hand, is down -20.10% year to date as of 11/13/2017. It currently trades at $21.47 and has returned -1.60% during the past week.
Halcon Resources Corporation (NYSE:HK) and Unit Corporation (NYSE:UNT) 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. Comparatively, UNT is expected to grow at a 44.00% annual rate. All else equal, UNT’s higher growth rate would imply a greater potential for capital appreciation.
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. EBITDA margin of 30.97% for Unit Corporation (UNT). HK’s ROI is -25.10% while UNT has a ROI of -3.60%. The interpretation is that UNT’s business generates a higher return on investment than HK’s.
The value of a stock is simply the present value of its future free cash flows. HK’s free cash flow (“FCF”) per share for the trailing twelve months was -7.22. Comparatively, UNT’s free cash flow per share was +0.11. On a percent-of-sales basis, HK’s free cash flow was -0.26% while UNT converted 0% of its revenues into cash flow. This means that, for a given level of sales, UNT 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. HK has a current ratio of 1.90 compared to 0.70 for UNT. This means that HK can more easily cover its most immediate liabilities over the next twelve months. HK’s debt-to-equity ratio is 0.70 versus a D/E of 0.66 for UNT. HK is therefore the more solvent of the two companies, and has lower financial risk.
HK trades at a forward P/E of 33.13, a P/B of 0.90, and a P/S of 2.15, compared to a forward P/E of 18.72, a P/B of 0.88, and a P/S of 1.56 for UNT. HK is the expensive 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. HK is currently priced at a -24.01% to its one-year price target of 9.33. Comparatively, UNT is -15.24% relative to its price target of 25.33. This suggests that HK 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 HK and 2.20 for UNT, which implies that analysts are more bullish on the outlook for UNT.
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. HK has a beta of 4.03 and UNT’s beta is 2.84. UNT’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. HK has a short ratio of 2.69 compared to a short interest of 7.17 for UNT. This implies that the market is currently less bearish on the outlook for HK.
Unit Corporation (NYSE:UNT) beats Halcon Resources Corporation (NYSE:HK) on a total of 10 of the 14 factors compared between the two stocks. UNT higher liquidity, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, UNT is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, RDC has better sentiment signals based on short interest.