McDermott International, Inc. (NYSE:MDR) shares are up more than 1.49% this year and recently decreased -1.83% or -$0.14 to settle at $7.50. Oceaneering International, Inc. (NYSE:OII), on the other hand, is down -28.39% year to date as of 11/13/2017. It currently trades at $20.20 and has returned -8.35% during the past week.
McDermott International, Inc. (NYSE:MDR) and Oceaneering International, Inc. (NYSE:OII) are the two most active stocks in the Oil & Gas Equipment & Services 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.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect MDR to grow earnings at a 17.30% annual rate over the next 5 years. Comparatively, OII is expected to grow at a -12.13% annual rate. All else equal, MDR’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. , compared to an EBITDA margin of 9.22% for Oceaneering International, Inc. (OII). MDR’s ROI is 4.30% while OII has a ROI of 2.30%. The interpretation is that MDR’s business generates a higher return on investment than OII’s.
Cash is king when it comes to investing. MDR’s free cash flow (“FCF”) per share for the trailing twelve months was +0.10. Comparatively, OII’s free cash flow per share was +0.09. On a percent-of-sales basis, MDR’s free cash flow was 1.08% while OII converted 0.39% of its revenues into cash flow. This means that, for a given level of sales, MDR is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. MDR has a current ratio of 1.70 compared to 2.70 for OII. This means that OII can more easily cover its most immediate liabilities over the next twelve months. MDR’s debt-to-equity ratio is 0.31 versus a D/E of 0.53 for OII. OII is therefore the more solvent of the two companies, and has lower financial risk.
MDR trades at a forward P/E of 19.08, a P/B of 1.23, and a P/S of 0.73, compared to a P/B of 1.33, and a P/S of 1.06 for OII. 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”. MDR is currently priced at a -11.14% to its one-year price target of 8.44. Comparatively, OII is -2.42% relative to its price target of 20.70. This suggests that MDR 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 2.50 for MDR and 3.00 for OII, which implies that analysts are more bullish on the outlook for OII.
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. MDR has a beta of 1.28 and OII’s beta is 1.64. MDR’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.MDR has a short ratio of 9.36 compared to a short interest of 6.64 for OII. This implies that the market is currently less bearish on the outlook for OII.
McDermott International, Inc. (NYSE:MDR) beats Oceaneering International, Inc. (NYSE:OII) on a total of 10 of the 14 factors compared between the two stocks. MDR is growing fastly, 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, MDR is the cheaper of the two stocks on book value and sales basis, MDR is more undervalued relative to its price target. Finally, NOV has better sentiment signals based on short interest.