Exelon Corporation (NYSE:EXC) shares are down more than -2.54% this year and recently increased 1.21% or $0.46 to settle at $38.41. NRG Energy, Inc. (NYSE:NRG), on the other hand, is up 0.46% year to date as of 01/11/2018. It currently trades at $28.61 and has returned 0.21% during the past week.
Exelon Corporation (NYSE:EXC) and NRG Energy, Inc. (NYSE:NRG) are the two most active stocks in the Diversified Utilities industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect EXC to grow earnings at a 0.28% annual rate over the next 5 years.
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 13.86% for NRG Energy, Inc. (NRG). EXC’s ROI is 3.80% while NRG has a ROI of 0.50%. The interpretation is that EXC’s business generates a higher return on investment than NRG’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. EXC’s free cash flow (“FCF”) per share for the trailing twelve months was +0.78. Comparatively, NRG’s free cash flow per share was +1.57. On a percent-of-sales basis, EXC’s free cash flow was 2.39% while NRG converted 4.02% of its revenues into cash flow. This means that, for a given level of sales, NRG is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. EXC has a current ratio of 1.00 compared to 1.30 for NRG. This means that NRG can more easily cover its most immediate liabilities over the next twelve months. EXC’s debt-to-equity ratio is 1.28 versus a D/E of 14.29 for NRG. NRG is therefore the more solvent of the two companies, and has lower financial risk.
EXC trades at a forward P/E of 13.31, a P/B of 1.31, and a P/S of 1.13, compared to a forward P/E of 14.71, a P/B of 7.67, and a P/S of 0.85 for NRG. 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. EXC is currently priced at a -11.56% to its one-year price target of 43.43. Comparatively, NRG is -12.99% relative to its price target of 32.88. This suggests that NRG 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 2.10 for EXC and 1.80 for NRG, which implies that analysts are more bullish on the outlook for EXC.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. EXC has a beta of 0.26 and NRG’s beta is 1.31. EXC’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. EXC has a short ratio of 2.84 compared to a short interest of 3.85 for NRG. This implies that the market is currently less bearish on the outlook for EXC.
Exelon Corporation (NYSE:EXC) beats NRG Energy, Inc. (NYSE:NRG) on a total of 8 of the 14 factors compared between the two stocks. EXC is growing fastly, is more profitable, generates a higher return on investment and has lower financial risk. In terms of valuation, EXC is the cheaper of the two stocks on an earnings and book value, Finally, EXC has better sentiment signals based on short interest.