Enbridge (TSX: ENB) and Suncor Energy (TSX: SU) are two of Canada’s best known energy companies. One is the biggest pipeline operator in North America, the other is an integrated energy company involved in exploration, production, marketing and refining. The two companies are in the same industry, but in opposite sub-sectors. This makes them comparing.
I’ve been reading about Enbridge and Suncor for years now. After studying it extensively, I actually invested in Suncor. Though I sold the shares that I owned earlier this year, I still think Suncor is a very strong company — stronger than Enbridge overall. In this article, I’ll explain why I ultimately chose Suncor over Enbridge after thoroughly studying both energy companies.
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Profitability
Suncor Energy is a lot more profitable than Enbridge is, by virtually any way in which you choose to measure profit. In the trailing 12-month period, it had a 60% gross margin, a 22% operating income (EBIT) margin, a 16% net margin, and a 16% free cash flow (FCF) margin. It also had a 19% return on equity and a 13% return on capital. In the same period, Enbridge had considerably weaker profit metrics. They included a 32% gross margin, a 14% EBIT margin, a 7% net margin, and a negative FCF margin. Enbridge’s returns on equity and capital were lower than Suncor’s as well. So, on the profitability front, Enbridge has performed less well than Suncor.
Growth
Growth is another area where Suncor usually performs better than Enbridge — though in this case, not all of the time.
In the trailing 12-month period, Suncor grew its revenue 13.75%, its EBIT 53%, its earnings 65%, and its FCF 27%. It also grew its earnings by 49% CAGR over the last five years (though that’s largely because earnings were barely positive in 2021).
Enbridge’s growth was less pronounced than Suncor’s in the LTM period. In the period, its revenue grew 14%, its earnings declined 9%, and its FCF was negative. Its revenue growth was a little higher than Suncor’s over the last five years, though the earnings growth in the period was negative.
Over most timeframes, Suncor has grown considerably faster than Enbridge. However, Enbridge fares better in periods where oil prices are low, as pipelines are less oil price-sensitive than integrated energy companies. That’s a point worth remembering.
Valuation
Last but not least, despite outscoring Enbridge on profitability and arguably on growth, Suncor Energy stock is considerably cheaper than ENB. At today’s price, it trades at just 11.7 times earnings, two times sales, and 2.3 times book. The same multiples for Enbridge are 23.5, 1.8, and 2.6. So, Suncor is cheaper than ENB while being more profitable and growing faster.
Foolish takeaway
Considering that it scores better than ENB on profitability, growth, and valuation, Suncor looks like the better buy out of the two stocks. The only caveat here is that the company is very sensitive to oil prices, and its earnings will probably decline somewhat when the Iran war finally ends and oil prices come down. However, there are many good reasons to think that oil prices will remain relatively healthy long term. So, Suncor stock seems like a decent bet. If it were to decline in price to $70, I’d likely buy it again.
