Transocean Ltd. (NYSE:RIG) shares are down more than -22.05% this year and recently increased 1.12% or $0.06 to settle at $5.41. General Mills, Inc. (NYSE:GIS), on the other hand, is up 33.49% year to date as of 11/07/2019. It currently trades at $51.98 and has returned 2.20% during the past week.
Transocean Ltd. (NYSE:RIG) and General Mills, Inc. (NYSE:GIS) are the two most active stocks in the Oil & Gas Drilling & Exploration 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.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect RIG to grow earnings at a 4.80% annual rate over the next 5 years. Comparatively, GIS is expected to grow at a 6.87% annual rate. All else equal, GIS’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., compared to an EBITDA margin of 19.63% for General Mills, Inc. (GIS). RIG’s ROI is -6.00% while GIS has a ROI of 10.30%. The interpretation is that GIS’s business generates a higher return on investment than RIG’s.Cash Flow
Earnings don’t always accurately reflect the amount of cash that a company brings in. RIG’s free cash flow (“FCF”) per share for the trailing twelve months was -0.05. Comparatively, GIS’s free cash flow per share was +0.33. On a percent-of-sales basis, RIG’s free cash flow was -1.01% while GIS converted 1.18% of its revenues into cash flow. This means that, for a given level of sales, GIS is able to generate more free cash flow for investors.
Balance sheet risk is one of the biggest factors to consider before investing. RIG has a current ratio of 2.50 compared to 0.60 for GIS. This means that RIG can more easily cover its most immediate liabilities over the next twelve months. RIG’s debt-to-equity ratio is 0.79 versus a D/E of 1.94 for GIS. GIS is therefore the more solvent of the two companies, and has lower financial risk.Valuation
RIG trades at a P/B of 0.28, and a P/S of 1.09, compared to a forward P/E of 15.14, a P/B of 4.27, and a P/S of 1.88 for GIS. RIG 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
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. RIG is currently priced at a -40.61% to its one-year price target of 9.11. Comparatively, GIS is -4.29% relative to its price target of 54.31. This suggests that RIG 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. RIG has a beta of 1.82 and GIS’s beta is 0.69. GIS’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. RIG has a short ratio of 3.19 compared to a short interest of 5.51 for GIS. This implies that the market is currently less bearish on the outlook for RIG.
Transocean Ltd. (NYSE:RIG) beats General Mills, Inc. (NYSE:GIS) on a total of 9 of the 14 factors compared between the two stocks. RIG is more profitable, higher liquidity and has lower financial risk. In terms of valuation, RIG is the cheaper of the two stocks on an earnings, book value and sales basis, RIG is more undervalued relative to its price target. Finally, RIG has better sentiment signals based on short interest.