Parsley Energy, Inc. (NYSE:PE) shares are down more than -25.17% this year and recently decreased -3.41% or -$0.9 to settle at $25.47. Matador Resources Company (NYSE:MTDR), on the other hand, is up 8.27% year to date as of 12/05/2017. It currently trades at $27.33 and has returned -0.36% during the past week.
Parsley Energy, Inc. (NYSE:PE) and Matador Resources Company (NYSE:MTDR) 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.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect PE to grow earnings at a 28.60% annual rate over the next 5 years. Comparatively, MTDR is expected to grow at a 30.00% annual rate. All else equal, MTDR’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 81.93% for Matador Resources Company (MTDR). PE’s ROI is 0.40% while MTDR has a ROI of -13.90%. The interpretation is that PE’s business generates a higher return on investment than MTDR’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. PE’s free cash flow (“FCF”) per share for the trailing twelve months was -1.06. Comparatively, MTDR’s free cash flow per share was -1.25. On a percent-of-sales basis, PE’s free cash flow was -0.07% while MTDR converted -0.05% of its revenues into cash flow. This means that, for a given level of sales, MTDR 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. PE has a current ratio of 0.90 compared to 0.60 for MTDR. This means that PE can more easily cover its most immediate liabilities over the next twelve months. PE’s debt-to-equity ratio is 0.32 versus a D/E of 0.63 for MTDR. MTDR is therefore the more solvent of the two companies, and has lower financial risk.
PE trades at a forward P/E of 27.27, a P/B of 1.41, and a P/S of 10.02, compared to a forward P/E of 27.83, a P/B of 3.09, and a P/S of 6.17 for MTDR. 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 is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. PE is currently priced at a -33.6% to its one-year price target of 38.36. Comparatively, MTDR is -10.63% relative to its price target of 30.58. This suggests that PE 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 1.70 for PE and 2.10 for MTDR, which implies that analysts are more bullish on the outlook for MTDR.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. PE has a beta of -0.06 and MTDR’s beta is 1.15. PE’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. PE has a short ratio of 2.94 compared to a short interest of 10.53 for MTDR. This implies that the market is currently less bearish on the outlook for PE.
Parsley Energy, Inc. (NYSE:PE) beats Matador Resources Company (NYSE:MTDR) on a total of 10 of the 14 factors compared between the two stocks. PE generates a higher return on investment, has higher cash flow per share, higher liquidity and has lower financial risk. In terms of valuation, PE is the cheaper of the two stocks on an earnings and book value, PE is more undervalued relative to its price target. Finally, PE has better sentiment signals based on short interest.