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Comparing Companhia Energetica de Minas Gerais (CIG) and Gran Tierra Energy Inc. (GTE)

Companhia Energetica de Minas Gerais (NYSE:CIG) shares are up more than 12.14% this year and recently decreased -1.70% or -$0.04 to settle at $2.31. Gran Tierra Energy Inc. (NYSE:GTE), on the other hand, is up 11.48% year to date as of 04/16/2018. It currently trades at $3.01 and has returned 11.48% during the past week.

Companhia Energetica de Minas Gerais (NYSE:CIG) and Gran Tierra Energy Inc. (NYSE:GTE) 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.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect CIG to grow earnings at a 0.00% annual rate over the next 5 years. Comparatively, GTE is expected to grow at a 10.00% annual rate. All else equal, GTE’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. EBITDA margin of 12.68% for Gran Tierra Energy Inc. (GTE). CIG’s ROI is 7.00% while GTE has a ROI of -2.70%. The interpretation is that CIG’s business generates a higher return on investment than GTE’s.

Cash Flow



Earnings don’t always accurately reflect the amount of cash that a company brings in. CIG’s free cash flow (“FCF”) per share for the trailing twelve months was -1.52. Comparatively, GTE’s free cash flow per share was -0.01. On a percent-of-sales basis, CIG’s free cash flow was -35.51% while GTE converted -0% of its revenues into cash flow. This means that, for a given level of sales, GTE 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. CIG has a current ratio of 1.00 compared to 0.90 for GTE. This means that CIG can more easily cover its most immediate liabilities over the next twelve months. CIG’s debt-to-equity ratio is 1.01 versus a D/E of 0.00 for GTE. CIG is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

CIG trades at a forward P/E of 4.99, a P/B of 0.72, and a P/S of 0.54, compared to a forward P/E of 8.62, a P/B of 1.27, and a P/S of 2.74 for GTE. CIG is the cheaper 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 isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. CIG is currently priced at a -25.48% to its one-year price target of 3.10. Comparatively, GTE is -23.8% relative to its price target of 3.95. This suggests that CIG is the better investment over the next year.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. CIG has a beta of 1.85 and GTE’s beta is 0.59. GTE’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. CIG has a short ratio of 1.83 compared to a short interest of 2.40 for GTE. This implies that the market is currently less bearish on the outlook for CIG.

Summary

Gran Tierra Energy Inc. (NYSE:GTE) beats Companhia Energetica de Minas Gerais (NYSE:CIG) on a total of 7 of the 14 factors compared between the two stocks. GTE generates a higher return on investment, is more profitable, has higher cash flow per share, 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, Finally, BA has better sentiment signals based on short interest.

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