Critical Comparison: BP p.l.c. (BP) vs. Nucor Corporation (NUE)

BP p.l.c. (NYSE:BP) shares are down more than -0.66% this year and recently decreased -0.34% or -$0.13 to settle at $37.67. Nucor Corporation (NYSE:NUE), on the other hand, is up 3.63% year to date as of 09/12/2019. It currently trades at $53.69 and has returned 6.63% during the past week.

BP p.l.c. (NYSE:BP) and Nucor Corporation (NYSE:NUE) 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

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 BP to grow earnings at a 31.50% annual rate over the next 5 years. Comparatively, NUE is expected to grow at a -3.92% 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 14.97% for Nucor Corporation (NUE). BP’s ROI is 4.60% while NUE has a ROI of 18.20%. The interpretation is that NUE’s business generates a higher return on investment than BP’s.

Cash Flow

The amount of free cash flow available to investors is ultimately what determines the value of a stock. BP’s free cash flow (“FCF”) per share for the trailing twelve months was +0.05. Comparatively, NUE’s free cash flow per share was +0.17. On a percent-of-sales basis, BP’s free cash flow was 0.06% while NUE converted 0.21% of its revenues into cash flow. This means that, for a given level of sales, NUE is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. BP has a current ratio of 1.10 compared to 3.60 for NUE. This means that NUE can more easily cover its most immediate liabilities over the next twelve months. BP’s debt-to-equity ratio is 0.77 versus a D/E of 0.42 for NUE. BP is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

BP trades at a forward P/E of 9.80, a P/B of 1.26, and a P/S of 0.43, compared to a forward P/E of 11.71, a P/B of 1.59, and a P/S of 0.65 for NUE. 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

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. BP is currently priced at a -25.82% to its one-year price target of 50.78. Comparatively, NUE is -9.7% relative to its price target of 59.46. This suggests that BP is the better investment over the next year.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. BP has a beta of 0.76 and NUE’s beta is 1.64. BP’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. BP has a short ratio of 0.46 compared to a short interest of 3.00 for NUE. This implies that the market is currently less bearish on the outlook for BP.

Summary

BP p.l.c. (NYSE:BP) beats Nucor Corporation (NYSE:NUE) on a total of 8 of the 14 factors compared between the two stocks. BP is growing fastly. 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.