Apache Corporation (NYSE:APA) shares are down more than -37.42% this year and recently decreased -1.17% or -$0.47 to settle at $39.72. Cobalt International Energy, Inc. (NYSE:CIE), on the other hand, is down -97.96% year to date as of 12/12/2017. It currently trades at $0.37 and has returned -25.94% during the past week.
Apache Corporation (NYSE:APA) and Cobalt International Energy, Inc. (NYSE:CIE) are the two most active stocks in the Independent Oil & Gas industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Comparatively, CIE is expected to grow at a 3.72% annual rate. All else equal, CIE’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. Apache Corporation (APA) has an EBITDA margin of 57.15%. This suggests that APA underlying business is more profitable APA’s ROI is -8.40% while CIE has a ROI of -138.10%. The interpretation is that APA’s business generates a higher return on investment than CIE’s.
If there’s one thing investors care more about than earnings, it’s cash flow. APA’s free cash flow (“FCF”) per share for the trailing twelve months was -0.82. Comparatively, CIE’s free cash flow per share was -1.64. On a percent-of-sales basis, APA’s free cash flow was -5.84% while CIE converted -0.29% of its revenues into cash flow. This means that, for a given level of sales, CIE 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. APA has a current ratio of 1.50 compared to 1.60 for CIE. This means that CIE can more easily cover its most immediate liabilities over the next twelve months.
APA trades at a forward P/E of 70.93, a P/B of 2.16, and a P/S of 2.66, compared to a P/S of 0.30 for CIE. APA 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
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. APA is currently priced at a -16.4% to its one-year price target of 47.51. Comparatively, CIE is -81.5% relative to its price target of 2.00. This suggests that CIE 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 APA and 3.30 for CIE, which implies that analysts are more bullish on the outlook for CIE.
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. APA has a beta of 1.06 and CIE’s beta is 1.56. APA’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. APA has a short ratio of 7.82 compared to a short interest of 6.37 for CIE. This implies that the market is currently less bearish on the outlook for CIE.
Cobalt International Energy, Inc. (NYSE:CIE) beats Apache Corporation (NYSE:APA) on a total of 9 of the 14 factors compared between the two stocks. CIE is more profitable, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, CIE is the cheaper of the two stocks on an earnings, book value and sales basis, CIE is more undervalued relative to its price target. Finally, CIE has better sentiment signals based on short interest.