National Oilwell Varco, Inc. (NYSE:NOV) shares are down more than -10.12% this year and recently decreased -3.91% or -$0.94 to settle at $23.10. UnitedHealth Group Incorporated (NYSE:UNH), on the other hand, is down -7.63% year to date as of 09/12/2019. It currently trades at $230.10 and has returned 0.22% during the past week.
National Oilwell Varco, Inc. (NYSE:NOV) and UnitedHealth Group Incorporated (NYSE:UNH) 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.
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 NOV to grow earnings at a 41.00% annual rate over the next 5 years. Comparatively, UNH is expected to grow at a 13.73% annual rate. All else equal, NOV’s higher growth rate would imply a greater potential for capital appreciation.
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. EBITDA margin of 8.99% for UnitedHealth Group Incorporated (UNH). NOV’s ROI is 0.90% while UNH has a ROI of 15.60%. The interpretation is that UNH’s business generates a higher return on investment than NOV’s.Cash Flow
Cash is king when it comes to investing. NOV’s free cash flow (“FCF”) per share for the trailing twelve months was -0.38. Comparatively, UNH’s free cash flow per share was +4.60. On a percent-of-sales basis, NOV’s free cash flow was -1.74% while UNH converted 1.93% of its revenues into cash flow. This means that, for a given level of sales, UNH is able to generate more free cash flow for investors.
NOV’s debt-to-equity ratio is 0.33 versus a D/E of 0.80 for UNH. UNH is therefore the more solvent of the two companies, and has lower financial risk.
NOV trades at a forward P/E of 29.69, a P/B of 1.05, and a P/S of 1.03, compared to a forward P/E of 13.81, a P/B of 4.12, and a P/S of 0.93 for UNH. NOV 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. NOV is currently priced at a -11.56% to its one-year price target of 26.12. Comparatively, UNH is -22.25% relative to its price target of 295.96. This suggests that UNH 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. NOV has a beta of 1.31 and UNH’s beta is 0.61. UNH’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. NOV has a short ratio of 4.14 compared to a short interest of 2.01 for UNH. This implies that the market is currently less bearish on the outlook for UNH.
UnitedHealth Group Incorporated (NYSE:UNH) beats National Oilwell Varco, Inc. (NYSE:NOV) on a total of 10 of the 14 factors compared between the two stocks. UNH is growing fastly, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, UNH is the cheaper of the two stocks on an earnings and sales basis, UNH is more undervalued relative to its price target. Finally, UNH has better sentiment signals based on short interest.