Earnings

A Side-by-side Analysis of TerraForm Global, Inc. (GLBL) and Avista Corporation (AVA)

TerraForm Global, Inc. (NASDAQ:GLBL) shares are up more than 28.48% this year and recently increased 1.00% or $0.04 to settle at $5.07. Avista Corporation (NYSE:AVA), on the other hand, is up 29.06% year to date as of 12/13/2017. It currently trades at $51.61 and has returned -0.12% during the past week.

TerraForm Global, Inc. (NASDAQ:GLBL) and Avista Corporation (NYSE:AVA) are the two most active stocks in the Diversified Utilities 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

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Comparatively, AVA is expected to grow at a 5.65% annual rate. All else equal, AVA’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 33.77% for Avista Corporation (AVA). GLBL’s ROI is 1.40% while AVA has a ROI of 6.00%. The interpretation is that AVA’s business generates a higher return on investment than GLBL’s.

Cash Flow 




Earnings don’t always accurately reflect the amount of cash that a company brings in. GLBL’s free cash flow (“FCF”) per share for the trailing twelve months was +0.17. Comparatively, AVA’s free cash flow per share was -0.83. On a percent-of-sales basis, GLBL’s free cash flow was 0.01% while AVA converted -3.71% of its revenues into cash flow. This means that, for a given level of sales, GLBL 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. GLBL has a current ratio of 1.70 compared to 0.50 for AVA. This means that GLBL can more easily cover its most immediate liabilities over the next twelve months. GLBL’s debt-to-equity ratio is 1.65 versus a D/E of 1.15 for AVA. GLBL is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

GLBL trades at a P/B of 0.86, and a P/S of 3.57, compared to a forward P/E of 24.81, a P/B of 1.99, and a P/S of 2.30 for AVA. 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. GLBL is currently priced at a -36.63% to its one-year price target of 8.00. Comparatively, AVA is 8.65% relative to its price target of 47.50. This suggests that GLBL 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 3.00 for GLBL and 3.70 for AVA, which implies that analysts are more bullish on the outlook for AVA.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. GLBL has a short ratio of 0.72 compared to a short interest of 8.01 for AVA. This implies that the market is currently less bearish on the outlook for GLBL.

Summary

TerraForm Global, Inc. (NASDAQ:GLBL) beats Avista Corporation (NYSE:AVA) on a total of 10 of the 14 factors compared between the two stocks. GLBL is more profitable, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, GLBL is the cheaper of the two stocks on an earnings and book value, GLBL is more undervalued relative to its price target. Finally, GLBL has better sentiment signals based on short interest.

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