McDermott International, Inc. (NYSE:MDR) shares are down more than -78.90% this year and recently decreased -7.38% or -$0.11 to settle at $1.38. NIKE, Inc. (NYSE:NKE), on the other hand, is up 21.93% year to date as of 11/07/2019. It currently trades at $90.40 and has returned 0.95% during the past week.
McDermott International, Inc. (NYSE:MDR) and NIKE, Inc. (NYSE:NKE) are the two most active stocks in the Oil & Gas Equipment & Services 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.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Comparatively, NKE is expected to grow at a 16.42% annual rate. All else equal, NKE’s higher growth rate would imply a greater potential for capital appreciation.
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 14.67% for NIKE, Inc. (NKE). MDR’s ROI is -54.90% while NKE has a ROI of 32.00%. The interpretation is that NKE’s business generates a higher return on investment than MDR’s.Cash Flow
Earnings don’t always accurately reflect the amount of cash that a company brings in. MDR’s free cash flow (“FCF”) per share for the trailing twelve months was -1.21. Comparatively, NKE’s free cash flow per share was -0.15. On a percent-of-sales basis, MDR’s free cash flow was -3.28% while NKE converted -0.6% of its revenues into cash flow. This means that, for a given level of sales, NKE is able to generate more free cash flow for investors.
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. MDR has a current ratio of 0.70 compared to 2.00 for NKE. This means that NKE can more easily cover its most immediate liabilities over the next twelve months. MDR’s debt-to-equity ratio is 7.47 versus a D/E of 0.40 for NKE. MDR is therefore the more solvent of the two companies, and has lower financial risk.Valuation
MDR trades at a forward P/E of 1.54, a P/B of 0.48, and a P/S of 0.03, compared to a forward P/E of 26.21, a P/B of 15.35, and a P/S of 3.56 for NKE. MDR 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. MDR is currently priced at a -81.75% to its one-year price target of 7.56. Comparatively, NKE is -11.7% relative to its price target of 102.38. This suggests that MDR is the better investment over the next year.
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. MDR has a beta of 3.14 and NKE’s beta is 0.84. NKE’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. MDR has a short ratio of 4.38 compared to a short interest of 1.38 for NKE. This implies that the market is currently less bearish on the outlook for NKE.
NIKE, Inc. (NYSE:NKE) beats McDermott International, Inc. (NYSE:MDR) on a total of 10 of the 14 factors compared between the two stocks. NKE , is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, MDR is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, NKE has better sentiment signals based on short interest.