Xcel Energy Inc. (NYSE:XEL) shares are down more than -5.38% this year and recently decreased -1.32% or -$0.61 to settle at $45.52. Great Plains Energy Incorporated (NYSE:GXP), on the other hand, is down -4.71% year to date as of 01/10/2018. It currently trades at $30.72 and has returned -2.35% during the past week.
Xcel Energy Inc. (NYSE:XEL) and Great Plains Energy Incorporated (NYSE:GXP) are the two most active stocks in the Electric Utilities 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 XEL to grow earnings at a 5.99% annual rate over the next 5 years. Comparatively, GXP is expected to grow at a 6.00% annual rate. All else equal, GXP’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 44.83% for Great Plains Energy Incorporated (GXP). XEL’s ROI is 6.30% while GXP has a ROI of 4.70%. The interpretation is that XEL’s business generates a higher return on investment than GXP’s.
If there’s one thing investors care more about than earnings, it’s cash flow. On a percent-of-sales basis, XEL’s free cash flow was 1.01% while GXP converted 0% of its revenues into cash flow. This means that, for a given level of sales, XEL is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. XEL has a current ratio of 0.90 compared to 1.40 for GXP. This means that GXP can more easily cover its most immediate liabilities over the next twelve months. XEL’s debt-to-equity ratio is 1.35 versus a D/E of 0.76 for GXP. XEL is therefore the more solvent of the two companies, and has lower financial risk.
XEL trades at a forward P/E of 18.62, a P/B of 2.02, and a P/S of 2.04, compared to a forward P/E of 18.02, a P/B of 1.29, and a P/S of 2.49 for GXP. XEL is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B 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 is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. XEL is currently priced at a -25.52% to its one-year price target of 61.12. Comparatively, GXP is -10.1% relative to its price target of 34.17. This suggests that XEL 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 5.00 for XEL and 1.90 for GXP, which implies that analysts are more bullish on the outlook for XEL.
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. XEL has a beta of 0.21 and GXP’s beta is 0.43. XEL’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. XEL has a short ratio of 3.93 compared to a short interest of 4.95 for GXP. This implies that the market is currently less bearish on the outlook for XEL.
Great Plains Energy Incorporated (NYSE:GXP) beats Xcel Energy Inc. (NYSE:XEL) on a total of 7 of the 14 factors compared between the two stocks. GXP generates a higher return on investment, is more profitable, higher liquidity and has lower financial risk. In terms of valuation, GXP is the cheaper of the two stocks on an earnings and book value, Finally, DUK has better sentiment signals based on short interest.