Denbury Resources Inc. (NYSE:DNR) shares are down more than -50.82% this year and recently decreased -3.26% or -$0.06 to settle at $1.75. California Resources Corporation (NYSE:CRC), on the other hand, is down -13.39% year to date as of 12/05/2017. It currently trades at $16.99 and has returned 22.52% during the past week.
Denbury Resources Inc. (NYSE:DNR) and California Resources Corporation (NYSE:CRC) are the two most active stocks in the Independent Oil & Gas industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Comparatively, CRC is expected to grow at a -11.60% annual rate. All else equal, DNR’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. 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 42.99% for California Resources Corporation (CRC). DNR’s ROI is -20.90% while CRC has a ROI of 16.60%. The interpretation is that CRC’s business generates a higher return on investment than DNR’s.
If there’s one thing investors care more about than earnings, it’s cash flow. DNR’s free cash flow (“FCF”) per share for the trailing twelve months was -0.01. Comparatively, CRC’s free cash flow per share was +0.14. On a percent-of-sales basis, DNR’s free cash flow was -0% while CRC converted 0.39% of its revenues into cash flow. This means that, for a given level of sales, CRC 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. DNR has a current ratio of 0.50 compared to 0.60 for CRC. This means that CRC can more easily cover its most immediate liabilities over the next twelve months.
DNR trades at a forward P/E of 12.93, a P/B of 1.37, and a P/S of 0.69, compared to a P/S of 0.38 for CRC. DNR 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. DNR is currently priced at a -0.57% to its one-year price target of 1.76. Comparatively, CRC is 10.11% relative to its price target of 15.43. This suggests that DNR 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 3.00 for DNR and 3.00 for CRC, which implies that analysts are equally bullish on their outlook for 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. DNR has a short ratio of 8.01 compared to a short interest of 8.89 for CRC. This implies that the market is currently less bearish on the outlook for DNR.
California Resources Corporation (NYSE:CRC) beats Denbury Resources Inc. (NYSE:DNR) on a total of 10 of the 14 factors compared between the two stocks. CRC is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, CRC is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, CNX has better sentiment signals based on short interest.