Plains GP Holdings, L.P. (NYSE:PAGP) shares are down more than -39.79% this year and recently decreased -3.11% or -$0.67 to settle at $20.88. Targa Resources Corp. (NYSE:TRGP), on the other hand, is down -24.58% year to date as of 11/13/2017. It currently trades at $42.29 and has returned -6.60% during the past week.
Plains GP Holdings, L.P. (NYSE:PAGP) and Targa Resources Corp. (NYSE:TRGP) are the two most active stocks in the Oil & Gas Pipelines industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
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 PAGP to grow earnings at a -6.80% annual rate over the next 5 years. Comparatively, TRGP is expected to grow at a 10.90% annual rate. All else equal, TRGP’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 1.75% for Targa Resources Corp. (TRGP). PAGP’s ROI is 6.70% while TRGP has a ROI of 1.10%. The interpretation is that PAGP’s business generates a higher return on investment than TRGP’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. PAGP’s free cash flow (“FCF”) per share for the trailing twelve months was +0.93. Comparatively, TRGP’s free cash flow per share was -2.30. On a percent-of-sales basis, PAGP’s free cash flow was 0.71% while TRGP converted -7.41% of its revenues into cash flow. This means that, for a given level of sales, PAGP 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. PAGP has a current ratio of 1.00 compared to 0.70 for TRGP. This means that PAGP can more easily cover its most immediate liabilities over the next twelve months. PAGP’s debt-to-equity ratio is 4.51 versus a D/E of 0.70 for TRGP. PAGP is therefore the more solvent of the two companies, and has lower financial risk.
PAGP trades at a forward P/E of 14.10, a P/B of 1.27, and a P/S of 0.25, compared to a P/B of 1.33, and a P/S of 1.13 for TRGP. 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. PAGP is currently priced at a -16.14% to its one-year price target of 24.90. Comparatively, TRGP is -19.78% relative to its price target of 52.72. This suggests that TRGP 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 PAGP and 2.10 for TRGP, which implies that analysts are equally bullish on their outlook for the two stocks.
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. PAGP has a beta of 1.52 and TRGP’s beta is 2.22. PAGP’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.PAGP has a short ratio of 1.44 compared to a short interest of 5.13 for TRGP. This implies that the market is currently less bearish on the outlook for PAGP.
Plains GP Holdings, L.P. (NYSE:PAGP) beats Targa Resources Corp. (NYSE:TRGP) on a total of 9 of the 14 factors compared between the two stocks. PAGP is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, PAGP is the cheaper of the two stocks on book value and sales basis, Finally, PAGP has better sentiment signals based on short interest.