Finance

A Side-by-side Analysis of Dominion Energy, Inc. (D) and American Homes 4 Rent (AMH)

Dominion Energy, Inc. (NYSE:D) shares are down more than -20.66% this year and recently decreased -0.89% or -$0.58 to settle at $64.31. American Homes 4 Rent (NYSE:AMH), on the other hand, is down -4.03% year to date as of 06/13/2018. It currently trades at $20.96 and has returned 0.29% during the past week.

Dominion Energy, Inc. (NYSE:D) and American Homes 4 Rent (NYSE:AMH) are the two most active stocks in the Electric Utilities industry 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.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect D to grow earnings at a 6.38% annual rate over the next 5 years. Comparatively, AMH is expected to grow at a 14.40% annual rate. All else equal, AMH’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 50.58% for American Homes 4 Rent (AMH). D’s ROI is 6.10% while AMH has a ROI of 0.90%. The interpretation is that D’s business generates a higher return on investment than AMH’s.

Cash Flow



Earnings don’t always accurately reflect the amount of cash that a company brings in. D’s free cash flow (“FCF”) per share for the trailing twelve months was -0.65. Comparatively, AMH’s free cash flow per share was +0.19. On a percent-of-sales basis, D’s free cash flow was -3.37% while AMH converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, AMH is able to generate more free cash flow for investors.

Liquidity and Financial Risk

D’s debt-to-equity ratio is 2.12 versus a D/E of 0.55 for AMH. D is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

D trades at a forward P/E of 15.22, a P/B of 2.37, and a P/S of 3.30, compared to a forward P/E of 78.21, a P/B of 1.17, and a P/S of 6.28 for AMH. 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. D is currently priced at a -11.3% to its one-year price target of 72.50. Comparatively, AMH is -12.67% relative to its price target of 24.00. This suggests that AMH 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. D has a beta of 0.26 and AMH’s beta is 0.60. D’s shares are therefore the less volatile of the two stocks.

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. D has a short ratio of 5.81 compared to a short interest of 3.38 for AMH. This implies that the market is currently less bearish on the outlook for AMH.

Summary




American Homes 4 Rent (NYSE:AMH) beats Dominion Energy, Inc. (NYSE:D) on a total of 9 of the 14 factors compared between the two stocks. AMH 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. AMH is more undervalued relative to its price target. Finally, AMH has better sentiment signals based on short interest.

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