Better Buy: Suncor Energy or Cenovus?

Suncor Energy (TSX:SU) is a large TSX energy company that is very popular. Could its smaller peer Cenovus Energy (TSX:CVE) be better?

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Suncor Energy (TSX:SU) and Cenovus Energy (TSX:CVE) are among the most popular energy stocks on the TSX. Suncor is a large-cap energy name that sells oil, refines oil, and operates gas stations. Cenovus has similar operations, minus the gas stations, as it exit that business recently.

If you’re looking for a Canadian energy stock to invest in, then SU and CVE are two of the obvious contenders. However, it’s not obvious which between the two is the better buy. They’re so similar that the comparison ends up being very close.

In this article, I will explore the two stocks side by side to see which is better for a Canadian investor seeking good returns.

The case for Suncor Energy

The main advantage that Suncor Energy has over Cenovus Energy is that it’s cheaper. At today’s prices, Suncor Energy trades at

  • 5.3 times adjusted earnings;
  • 1.08 times sales;
  • 1.55 times book value; and
  • 3.86 times operating cash flow.

By contrast, Cenovus trades at

  • 7.7 times earnings;
  • 0.73 times sales;
  • 1.76 times book value; and
  • 4.1 times operating cash flow.

Apart from the sales multiple, all of SU’s multiples are lower than CVE’s. Given that CVE and SU are similar businesses, their growth and profitability should be very similar.

Another advantage Suncor has is that it’s still in the gas station business. Gas stations can be very profitable: Alimentation Couche-Tard’s entire 1,000% run over the last 13 years was powered by profitable gas stations. Cenovus left that business, but Suncor is still in it, so Suncor has a chance to make more money than Cenovus.

The case for Cenovus Energy

The main advantage Cenovus has over Suncor Energy is its lack of legal issues. Over the last few years, Suncor has been plagued by ethical issues ranging from workplace safety to environmental concerns and more. Occasionally, these issues have had legal consequences. For example, the state of Colorado recently imposed new climate-related regulations on Suncor. Suncor challenged the move in court, but it will incur costs if it hopes to keep up the litigation long term.

Cenovus is much less exposed to this than Suncor is. It hasn’t had many major workplace safety incidents in the last year and has exited the gas station business. These factors may impede revenue growth but they could also lead to better stock price appreciation, as some funds (known as ESG, or environmental, social, and governance, funds) avoid companies thought to have ethical issues.

Cenovus Energy stock has risen a lot more than Suncor Energy stock has over the last 12 months, despite the two businesses being very similar. It could be that CVE’s gas station sale has paid off. CVE has said in many earnings releases that gas stations would “discourage investment,” by which it meant discourage people from buying its shares. That may explain why it’s performing so much better than Suncor, which still has its gas station business intact.

Fool takeaway

Taking all things into consideration, I consider Suncor Energy to be a somewhat better buy than Cenovus Energy. It’s cheaper, it’s similar in terms of profitability, and it still owns gas stations (for me, that’s a positive). Not everybody will agree with this assessment. Some think that gas stations are a real liability. They might be a liability for stock prices, but not for dividends.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alimentation Couche-Tard. The Motley Fool has a disclosure policy.

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