MGM Resorts International (NYSE:MGM) shares are up more than 3.14% this year and recently increased 3.95% or $1.31 to settle at $34.44. Companhia Energetica de Minas Gerais (NYSE:CIG), on the other hand, is up 13.59% year to date as of 02/14/2018. It currently trades at $2.34 and has returned 3.54% during the past week.
MGM Resorts International (NYSE:MGM) and Companhia Energetica de Minas Gerais (NYSE:CIG) are the two most active stocks in the market based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
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 MGM to grow earnings at a 7.90% annual rate over the next 5 years. Comparatively, CIG is expected to grow at a 0.00% annual rate. All else equal, MGM’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. MGM Resorts International (MGM) has an EBITDA margin of 25.52%. This suggests that MGM underlying business is more profitable MGM’s ROI is 10.70% while CIG has a ROI of 6.30%. The interpretation is that MGM’s business generates a higher return on investment than CIG’s.
Cash is king when it comes to investing. MGM’s free cash flow (“FCF”) per share for the trailing twelve months was -0.03. Comparatively, CIG’s free cash flow per share was +0.19. On a percent-of-sales basis, MGM’s free cash flow was -0.18% while CIG converted 4.44% of its revenues into cash flow. This means that, for a given level of sales, CIG 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. MGM has a current ratio of 1.00 compared to 0.60 for CIG. This means that MGM can more easily cover its most immediate liabilities over the next twelve months. MGM’s debt-to-equity ratio is 2.14 versus a D/E of 1.06 for CIG. MGM is therefore the more solvent of the two companies, and has lower financial risk.
MGM trades at a forward P/E of 23.41, a P/B of 3.13, and a P/S of 1.84, compared to a forward P/E of 7.11, a P/B of 0.75, and a P/S of 0.56 for CIG. MGM is the expensive of the two stocks on an earnings, book value and sales basis. 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. MGM is currently priced at a -11.99% to its one-year price target of 39.13. Comparatively, CIG is -25.24% relative to its price target of 3.13. This suggests that CIG 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 1.90 for MGM and 2.00 for CIG, which implies that analysts are more bullish on the outlook for CIG.
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. MGM has a beta of 1.37 and CIG’s beta is 2.04. MGM’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.MGM has a short ratio of 2.64 compared to a short interest of 1.82 for CIG. This implies that the market is currently less bearish on the outlook for CIG.
Companhia Energetica de Minas Gerais (NYSE:CIG) beats MGM Resorts International (NYSE:MGM) on a total of 8 of the 14 factors compared between the two stocks. CIG is growing fastly, has a higher cash conversion rate and has lower financial risk. In terms of valuation, CIG is the cheaper of the two stocks on an earnings, book value and sales basis, CIG is more undervalued relative to its price target. Finally, CIG has better sentiment signals based on short interest.