Public Service Enterprise Group Incorporated (NYSE:PEG) shares are up more than 6.20% this year and recently increased 0.76% or $0.35 to settle at $46.60. NiSource Inc. (NYSE:NI), on the other hand, is up 15.22% year to date as of 10/02/2017. It currently trades at $25.51 and has returned -1.54% during the past week.
Public Service Enterprise Group Incorporated (NYSE:PEG) and NiSource Inc. (NYSE:NI) are the two most active stocks in the Diversified Utilities industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect PEG to grow earnings at a 0.79% annual rate over the next 5 years. Comparatively, NI is expected to grow at a 7.40% annual rate. All else equal, NI’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
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. Public Service Enterprise Group Incorporated (PEG) has an EBITDA margin of 39.06%, compared to an EBITDA margin of 28.37% for NiSource Inc. (NI). This suggests that PEG underlying business is more profitable. PEG’s ROI is 4.60% while NI has a ROI of 5.60%. The interpretation is that NI’s business generates a higher return on investment than PEG’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. PEG’s free cash flow (“FCF”) per share for the trailing twelve months was -1.14. Comparatively, NI’s free cash flow per share was -0.73. On a percent-of-sales basis, PEG’s free cash flow was -6.37% while NI converted -5.29% of its revenues into cash flow. This means that, for a given level of sales, NI is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. PEG has a current ratio of 1.00 compared to 0.50 for NI. This means that PEG can more easily cover its most immediate liabilities over the next twelve months. PEG’s debt-to-equity ratio is 0.97 versus a D/E of 2.00 for NI. NI is therefore the more solvent of the two companies, and has lower financial risk.
PEG trades at a forward P/E of 15.84, a P/B of 1.82, and a P/S of 2.54, compared to a forward P/E of 20.23, a P/B of 2.01, and a P/S of 1.75 for NI. 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. PEG is currently priced at a -4.31% to its one-year price target of $48.70. Comparatively, NI is -7.1% relative to its price target of $27.46. This suggests that NI is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.30 for PEG and 2.30 for NI, which implies that analysts are equally bullish on their outlook for the two stocks.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. PEG has a beta of 0.41 and NI’s beta is 0.33. NI’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. PEG has a short ratio of 2.49 compared to a short interest of 2.26 for NI. This implies that the market is currently less bearish on the outlook for NI.
NiSource Inc. (NYSE:NI) beats Public Service Enterprise Group Incorporated (NYSE:PEG) on a total of 8 of the 14 factors compared between the two stocks. NI is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. NI is more undervalued relative to its price target. Finally, NI has better sentiment signals based on short interest.