PPL Corporation (NYSE:PPL) shares are down more than -0.23% this year and recently decreased -0.06% or -$0.02 to settle at $30.88. Dominion Energy, Inc. (NYSE:D), on the other hand, is down -5.98% year to date as of 01/10/2018. It currently trades at $76.21 and has returned -0.81% during the past week.
PPL Corporation (NYSE:PPL) and Dominion Energy, Inc. (NYSE:D) 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.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect PPL to grow earnings at a -0.03% annual rate over the next 5 years. Comparatively, D is expected to grow at a 3.64% annual rate. All else equal, D’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 52.57% for Dominion Energy, Inc. (D). PPL’s ROI is 8.20% while D has a ROI of 6.00%. The interpretation is that PPL’s business generates a higher return on investment than D’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. PPL’s free cash flow (“FCF”) per share for the trailing twelve months was -0.12. Comparatively, D’s free cash flow per share was -0.95. On a percent-of-sales basis, PPL’s free cash flow was -1.1% while D converted -5.22% of its revenues into cash flow. This means that, for a given level of sales, PPL is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. PPL has a current ratio of 0.60 compared to 0.50 for D. This means that PPL can more easily cover its most immediate liabilities over the next twelve months. PPL’s debt-to-equity ratio is 1.94 versus a D/E of 2.26 for D. D is therefore the more solvent of the two companies, and has lower financial risk.
PPL trades at a forward P/E of 13.26, a P/B of 1.98, and a P/S of 2.87, compared to a forward P/E of 18.88, a P/B of 3.01, and a P/S of 3.93 for D. PPL 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 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. PPL is currently priced at a -16.74% to its one-year price target of 37.09. Comparatively, D is -7.71% relative to its price target of 82.58. This suggests that PPL 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 2.70 for PPL and 2.50 for D, which implies that analysts are more bullish on the outlook for PPL.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. PPL has a beta of 0.48 and D’s beta is 0.25. D’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.PPL has a short ratio of 3.08 compared to a short interest of 5.72 for D. This implies that the market is currently less bearish on the outlook for PPL.
PPL Corporation (NYSE:PPL) beats Dominion Energy, Inc. (NYSE:D) on a total of 11 of the 14 factors compared between the two stocks. PPL is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, PPL is the cheaper of the two stocks on an earnings, book value and sales basis, PPL is more undervalued relative to its price target. Finally, PPL has better sentiment signals based on short interest.