Calpine Corporation (NYSE:CPN) and CMS Energy Corporation (NYSE:CMS) 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect CPN to grow earnings at a 1.70% annual rate over the next 5 years. Comparatively, CMS is expected to grow at a 7.52% annual rate. All else equal, CMS’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use Return on Investment (ROI) as measures of profitability and return. CPN’s ROI is 5.00% while CMS has a ROI of 7.20%. The interpretation is that CMS’s business generates a higher return on investment than CPN’s.
If there’s one thing investors care more about than earnings, it’s cash flow. CPN’s free cash flow (“FCF”) per share for the trailing twelve months was +0.15. Comparatively, CMS’s free cash flow per share was -0.01. On a percent-of-sales basis, CPN’s free cash flow was 0.81% while CMS converted -0.04% of its revenues into cash flow. This means that, for a given level of sales, CPN 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. CPN has a current ratio of 1.10 compared to 1.00 for CMS. This means that CPN can more easily cover its most immediate liabilities over the next twelve months. CPN’s debt-to-equity ratio is 3.98 versus a D/E of 2.25 for CMS. CPN is therefore the more solvent of the two companies, and has lower financial risk.
CPN trades at a forward P/E of 16.49, a P/B of 1.74, and a P/S of 0.64, compared to a forward P/E of 20.80, a P/B of 3.05, and a P/S of 2.10 for CMS. CPN 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
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. CPN is currently priced at a -2.79% to its one-year price target of $15.06. Comparatively, CMS is 0.56% relative to its price target of $48.23. This suggests that CPN 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 2.40 for CPN and 2.50 for CMS, which implies that analysts are more bullish on the outlook for CMS.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. CPN has a beta of 1.02 and CMS’s beta is 0.15. CMS’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. CPN has a short ratio of 2.33 compared to a short interest of 2.70 for CMS. This implies that the market is currently less bearish on the outlook for CPN.
Calpine Corporation (NYSE:CPN) beats CMS Energy Corporation (NYSE:CMS) on a total of 10 of the 14 factors compared between the two stocks. CPN is more profitable, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, CPN is the cheaper of the two stocks on an earnings, book value and sales basis, CPN is more undervalued relative to its price target. Finally, CPN has better sentiment signals based on short interest.