Duke Energy Corporation (NYSE:DUK) shares are up more than 14.96% this year and recently decreased -0.15% or -$0.13 to settle at $89.23. CMS Energy Corporation (NYSE:CMS), on the other hand, is up 18.04% year to date as of 11/07/2017. It currently trades at $49.13 and has returned 2.21% during the past week.
Duke Energy Corporation (NYSE:DUK) and CMS Energy Corporation (NYSE:CMS) are the two most active stocks in the Electric Utilities industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect DUK to grow earnings at a 3.24% annual rate over the next 5 years. Comparatively, CMS is expected to grow at a 7.44% annual rate. All else equal, CMS’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of -330.14% for CMS Energy Corporation (CMS). DUK’s ROI is 4.50% while CMS has a ROI of 7.20%. The interpretation is that CMS’s business generates a higher return on investment than DUK’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. DUK’s free cash flow (“FCF”) per share for the trailing twelve months was -0.40. Comparatively, CMS’s free cash flow per share was -1.69. On a percent-of-sales basis, DUK’s free cash flow was -1.23% while CMS converted -7.45% of its revenues into cash flow. This means that, for a given level of sales, DUK is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. DUK has a current ratio of 0.60 compared to 0.90 for CMS. This means that CMS can more easily cover its most immediate liabilities over the next twelve months. DUK’s debt-to-equity ratio is 1.28 versus a D/E of 2.28 for CMS. CMS is therefore the more solvent of the two companies, and has lower financial risk.
DUK trades at a forward P/E of 18.44, a P/B of 1.51, and a P/S of 2.73, compared to a forward P/E of 21.07, a P/B of 3.04, and a P/S of 2.15 for CMS. 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. DUK is currently priced at a 2.34% to its one-year price target of 87.19. Comparatively, CMS is -1.29% relative to its price target of 49.77. This suggests that CMS 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 3.10 for DUK and 2.50 for CMS, which implies that analysts are more bullish on the outlook for DUK.
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. DUK has a beta of 0.26 and CMS’s beta is 0.18. 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. DUK has a short ratio of 4.19 compared to a short interest of 3.55 for CMS. This implies that the market is currently less bearish on the outlook for CMS.
CMS Energy Corporation (NYSE:CMS) beats Duke Energy Corporation (NYSE:DUK) on a total of 8 of the 14 factors compared between the two stocks. CMS is more profitable, generates a higher return on investment and higher liquidity. CMS is more undervalued relative to its price target. Finally, CMS has better sentiment signals based on short interest.