Global

Schlumberger Limited (SLB) vs. The Kroger Co. (KR): Which is the Better Investment?

Schlumberger Limited (NYSE:SLB) shares are down more than -9.75% this year and recently decreased -3.63% or -$2.29 to settle at $60.82. The Kroger Co. (NYSE:KR), on the other hand, is up 1.02% year to date as of 10/10/2018. It currently trades at $27.73 and has returned -5.62% during the past week.

Schlumberger Limited (NYSE:SLB) and The Kroger Co. (NYSE:KR) are the two most active stocks in the Oil & Gas Equipment & Services 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.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect SLB to grow earnings at a 43.40% annual rate over the next 5 years. Comparatively, KR is expected to grow at a 6.47% annual rate. All else equal, SLB’s higher growth rate would imply a greater potential for capital appreciation.

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. , compared to an EBITDA margin of 5.5% for The Kroger Co. (KR). SLB’s ROI is -1.90% while KR has a ROI of 7.00%. The interpretation is that KR’s business generates a higher return on investment than SLB’s.

Cash Flow



Cash is king when it comes to investing. SLB’s free cash flow (“FCF”) per share for the trailing twelve months was -0.16. Comparatively, KR’s free cash flow per share was +0.03. On a percent-of-sales basis, SLB’s free cash flow was -0.73% while KR converted 0.02% of its revenues into cash flow. This means that, for a given level of sales, KR is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. SLB has a current ratio of 1.10 compared to 0.70 for KR. This means that SLB can more easily cover its most immediate liabilities over the next twelve months. SLB’s debt-to-equity ratio is 0.48 versus a D/E of 1.97 for KR. KR is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

SLB trades at a forward P/E of 24.44, a P/B of 2.31, and a P/S of 2.61, compared to a forward P/E of 12.38, a P/B of 3.00, and a P/S of 0.18 for KR. SLB is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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. SLB is currently priced at a -18.71% to its one-year price target of 74.82. Comparatively, KR is -9.88% relative to its price target of 30.77. This suggests that SLB is the better investment over the next year.

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. SLB has a beta of 0.91 and KR’s beta is 0.90. KR’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. SLB has a short ratio of 2.45 compared to a short interest of 3.40 for KR. This implies that the market is currently less bearish on the outlook for SLB.

Summary

Schlumberger Limited (NYSE:SLB) beats The Kroger Co. (NYSE:KR) on a total of 8 of the 14 factors compared between the two stocks. SLB is growing fastly, is more profitable, higher liquidity and has lower financial risk. SLB is more undervalued relative to its price target. Finally, SLB has better sentiment signals based on short interest.

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