BP p.l.c. (NYSE:BP) shares are up more than 7.42% this year and recently decreased -1.87% or -$0.86 to settle at $45.15. PepsiCo, Inc. (NASDAQ:PEP), on the other hand, is down -10.49% year to date as of 10/10/2018. It currently trades at $107.34 and has returned -0.17% during the past week.
BP p.l.c. (NYSE:BP) and PepsiCo, Inc. (NASDAQ:PEP) are the two most active stocks in the Major Integrated Oil & Gas industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.Growth
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect BP to grow earnings at a 32.00% annual rate over the next 5 years. Comparatively, PEP is expected to grow at a 6.95% annual rate. All else equal, BP’s higher growth rate would imply a greater potential for capital appreciation.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. EBITDA margin of 19.96% for PepsiCo, Inc. (PEP). BP’s ROI is 2.10% while PEP has a ROI of 16.40%. The interpretation is that PEP’s business generates a higher return on investment than BP’s.Cash Flow
Earnings don’t always accurately reflect the amount of cash that a company brings in. BP’s free cash flow (“FCF”) per share for the trailing twelve months was +0.04. Comparatively, PEP’s free cash flow per share was +1.19. On a percent-of-sales basis, BP’s free cash flow was 0.05% while PEP converted 2.64% of its revenues into cash flow. This means that, for a given level of sales, PEP 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. BP has a current ratio of 1.10 compared to 1.30 for PEP. This means that PEP can more easily cover its most immediate liabilities over the next twelve months. BP’s debt-to-equity ratio is 0.60 versus a D/E of 3.41 for PEP. PEP is therefore the more solvent of the two companies, and has lower financial risk.Valuation
BP trades at a forward P/E of 12.49, a P/B of 1.50, and a P/S of 0.56, compared to a forward P/E of 17.93, a P/B of 14.76, and a P/S of 2.35 for PEP. BP 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. BP is currently priced at a -10.51% to its one-year price target of 50.45. Comparatively, PEP is -8.93% relative to its price target of 117.86. This suggests that BP is the better investment over the next year.
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. BP has a beta of 0.83 and PEP’s beta is 0.68. PEP’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. BP has a short ratio of 0.85 compared to a short interest of 1.48 for PEP. This implies that the market is currently less bearish on the outlook for BP.Summary
BP p.l.c. (NYSE:BP) beats PepsiCo, Inc. (NASDAQ:PEP) on a total of 7 of the 14 factors compared between the two stocks. BP is growing fastly and has lower financial risk. In terms of valuation, BP is the cheaper of the two stocks on an earnings, book value and sales basis, BP is more undervalued relative to its price target. Finally, BP has better sentiment signals based on short interest.