Southwestern Energy Company (NYSE:SWN) shares are down more than -48.80% this year and recently decreased -4.65% or -$0.27 to settle at $5.54. Occidental Petroleum Corporation (NYSE:OXY), on the other hand, is down -1.68% year to date as of 12/12/2017. It currently trades at $70.03 and has returned 0.04% during the past week.
Southwestern Energy Company (NYSE:SWN) and Occidental Petroleum Corporation (NYSE:OXY) 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 consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect SWN to grow earnings at a 20.90% annual rate over the next 5 years.
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 40.36% for Occidental Petroleum Corporation (OXY). SWN’s ROI is -39.80% while OXY has a ROI of -3.50%. The interpretation is that OXY’s business generates a higher return on investment than SWN’s.
The value of a stock is simply the present value of its future free cash flows. SWN’s free cash flow (“FCF”) per share for the trailing twelve months was -0.24. Comparatively, OXY’s free cash flow per share was -0.60. On a percent-of-sales basis, SWN’s free cash flow was -5.05% while OXY converted -4.55% of its revenues into cash flow. This means that, for a given level of sales, OXY 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. SWN has a current ratio of 1.90 compared to 1.10 for OXY. This means that SWN can more easily cover its most immediate liabilities over the next twelve months. SWN’s debt-to-equity ratio is 2.69 versus a D/E of 0.48 for OXY. SWN is therefore the more solvent of the two companies, and has lower financial risk.
SWN trades at a forward P/E of 7.07, a P/B of 1.67, and a P/S of 0.97, compared to a forward P/E of 44.07, a P/B of 2.59, and a P/S of 4.48 for OXY. SWN 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. SWN is currently priced at a -33.73% to its one-year price target of 8.36. Comparatively, OXY is 2.91% relative to its price target of 68.05. This suggests that SWN 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 2.70 for SWN and 2.60 for OXY, which implies that analysts are more bullish on the outlook for SWN.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. SWN has a beta of 1.27 and OXY’s beta is 0.69. OXY’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.SWN has a short ratio of 2.49 compared to a short interest of 2.23 for OXY. This implies that the market is currently less bearish on the outlook for OXY.
Southwestern Energy Company (NYSE:SWN) beats Occidental Petroleum Corporation (NYSE:OXY) on a total of 8 of the 14 factors compared between the two stocks. SWN is growing fastly, is more profitable, has higher cash flow per share and higher liquidity. In terms of valuation, SWN is the cheaper of the two stocks on an earnings, book value and sales basis, SWN is more undervalued relative to its price target. Finally, ENLK has better sentiment signals based on short interest.