Range Resources Corporation (NYSE:RRC) shares are down more than -49.71% this year and recently decreased -4.80% or -$0.83 to settle at $16.45. Hess Corporation (NYSE:HES), on the other hand, is down -25.69% year to date as of 12/05/2017. It currently trades at $44.86 and has returned 6.71% during the past week.
Range Resources Corporation (NYSE:RRC) and Hess Corporation (NYSE:HES) 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect RRC to grow earnings at a 20.00% annual rate over the next 5 years. Comparatively, HES is expected to grow at a 5.00% annual rate. All else equal, RRC’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. Range Resources Corporation (RRC) has an EBITDA margin of 41.06%. This suggests that RRC underlying business is more profitable RRC’s ROI is -0.90% while HES has a ROI of -27.00%. The interpretation is that RRC’s business generates a higher return on investment than HES’s.
If there’s one thing investors care more about than earnings, it’s cash flow. RRC’s free cash flow (“FCF”) per share for the trailing twelve months was -0.52. Comparatively, HES’s free cash flow per share was -1.64. On a percent-of-sales basis, RRC’s free cash flow was -11.74% while HES converted -10.94% of its revenues into cash flow. This means that, for a given level of sales, HES is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. RRC has a current ratio of 0.50 compared to 1.80 for HES. This means that HES can more easily cover its most immediate liabilities over the next twelve months. RRC’s debt-to-equity ratio is 0.72 versus a D/E of 0.51 for HES. RRC is therefore the more solvent of the two companies, and has lower financial risk.
RRC trades at a forward P/E of 27.39, a P/B of 0.77, and a P/S of 1.91, compared to a P/B of 1.11, and a P/S of 2.73 for HES. 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. RRC is currently priced at a -43.43% to its one-year price target of 29.08. Comparatively, HES is -12.71% relative to its price target of 51.39. This suggests that RRC 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 RRC and 2.40 for HES, which implies that analysts are more bullish on the outlook for HES.
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. RRC has a beta of 0.93 and HES’s beta is 1.77. RRC’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. RRC has a short ratio of 4.48 compared to a short interest of 6.80 for HES. This implies that the market is currently less bearish on the outlook for RRC.
Range Resources Corporation (NYSE:RRC) beats Hess Corporation (NYSE:HES) on a total of 10 of the 14 factors compared between the two stocks. RRC is growing fastly, is more profitable, generates a higher return on investment and has higher cash flow per share. In terms of valuation, RRC is the cheaper of the two stocks on book value and sales basis, RRC is more undervalued relative to its price target. Finally, RRC has better sentiment signals based on short interest.