Chesapeake Energy Corporation (NYSE:CHK) shares are down more than -45.73% this year and recently decreased -0.52% or -$0.02 to settle at $3.81. Cabot Oil & Gas Corporation (NYSE:COG), on the other hand, is up 18.15% year to date as of 12/12/2017. It currently trades at $27.60 and has returned -2.58% during the past week.
Chesapeake Energy Corporation (NYSE:CHK) and Cabot Oil & Gas Corporation (NYSE:COG) 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. Analysts expect CHK to grow earnings at a 5.00% annual rate over the next 5 years. Comparatively, COG is expected to grow at a 38.00% annual rate. All else equal, COG’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. EBITDA margin of 25.04% for Cabot Oil & Gas Corporation (COG). CHK’s ROI is -56.90% while COG has a ROI of -8.00%. The interpretation is that COG’s business generates a higher return on investment than CHK’s.
If there’s one thing investors care more about than earnings, it’s cash flow. CHK’s free cash flow (“FCF”) per share for the trailing twelve months was +0.26. Comparatively, COG’s free cash flow per share was -0.06. On a percent-of-sales basis, CHK’s free cash flow was 3% while COG converted -2.4% of its revenues into cash flow. This means that, for a given level of sales, CHK 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. CHK has a current ratio of 0.50 compared to 1.60 for COG. This means that COG can more easily cover its most immediate liabilities over the next twelve months.
CHK trades at a forward P/E of 5.16, and a P/S of 0.39, compared to a forward P/E of 28.22, a P/B of 4.83, and a P/S of 7.67 for COG. CHK is the cheaper 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
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. CHK is currently priced at a -16.45% to its one-year price target of 4.56. Comparatively, COG is -12.13% relative to its price target of 31.41. This suggests that CHK 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 3.10 for CHK and 2.20 for COG, which implies that analysts are more bullish on the outlook for CHK.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. CHK has a beta of 2.17 and COG’s beta is 0.54. COG’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. CHK has a short ratio of 6.25 compared to a short interest of 3.16 for COG. This implies that the market is currently less bearish on the outlook for COG.
Cabot Oil & Gas Corporation (NYSE:COG) beats Chesapeake Energy Corporation (NYSE:CHK) on a total of 7 of the 14 factors compared between the two stocks. COG has higher cash flow per share, is more profitable, generates a higher return on investment and higher liquidity. In terms of valuation, CHK is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, COG has better sentiment signals based on short interest.