Earnings

Critical Comparison: SM Energy Company (SM) vs. Callon Petroleum Company (CPE)

SM Energy Company (NYSE:SM) shares are down more than -37.50% this year and recently decreased -1.69% or -$0.37 to settle at $21.55. Callon Petroleum Company (NYSE:CPE), on the other hand, is down -29.08% year to date as of 12/12/2017. It currently trades at $10.90 and has returned -4.13% during the past week.

SM Energy Company (NYSE:SM) and Callon Petroleum Company (NYSE:CPE) are the two most active stocks in the Independent Oil & Gas industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

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. EBITDA margin of 34.88% for Callon Petroleum Company (CPE). SM’s ROI is -11.10% while CPE has a ROI of -2.80%. The interpretation is that CPE’s business generates a higher return on investment than SM’s.



Cash Flow 

Cash is king when it comes to investing. SM’s free cash flow (“FCF”) per share for the trailing twelve months was -1.16. Comparatively, CPE’s free cash flow per share was -0.34. On a percent-of-sales basis, SM’s free cash flow was -10.64% while CPE converted -0.03% of its revenues into cash flow. This means that, for a given level of sales, CPE 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. SM has a current ratio of 1.50 compared to 0.80 for CPE. This means that SM can more easily cover its most immediate liabilities over the next twelve months. SM’s debt-to-equity ratio is 1.20 versus a D/E of 0.32 for CPE. SM is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

SM trades at a P/B of 1.00, and a P/S of 1.87, compared to a forward P/E of 15.53, a P/B of 1.20, and a P/S of 6.97 for CPE. SM 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

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. SM is currently priced at a -20.33% to its one-year price target of 27.05. Comparatively, CPE is -30.13% relative to its price target of 15.60. This suggests that CPE 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 2.30 for SM and 1.70 for CPE, which implies that analysts are more bullish on the outlook for SM.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. SM has a beta of 3.01 and CPE’s beta is 1.32. CPE’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.SM has a short ratio of 4.16 compared to a short interest of 7.83 for CPE. This implies that the market is currently less bearish on the outlook for SM.

Summary

Callon Petroleum Company (NYSE:CPE) beats SM Energy Company (NYSE:SM) on a total of 8 of the 14 factors compared between the two stocks. CPE higher liquidity, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, SM is the cheaper of the two stocks on an earnings, book value and sales basis, CPE is more undervalued relative to its price target. Finally, COG has better sentiment signals based on short interest.

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