American Electric Power Company, Inc. (NYSE:AEP) shares are down more than -6.58% this year and recently decreased -1.11% or -$0.77 to settle at $68.73. WEC Energy Group, Inc. (NYSE:WEC), on the other hand, is down -4.29% year to date as of 01/10/2018. It currently trades at $63.58 and has returned -2.65% during the past week.
American Electric Power Company, Inc. (NYSE:AEP) and WEC Energy Group, Inc. (NYSE:WEC) 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.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect AEP to grow earnings at a 2.77% annual rate over the next 5 years. Comparatively, WEC is expected to grow at a 5.27% annual rate. All else equal, WEC’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 35.9% for WEC Energy Group, Inc. (WEC). AEP’s ROI is 3.30% while WEC has a ROI of 5.80%. The interpretation is that WEC’s business generates a higher return on investment than AEP’s.
The value of a stock is simply the present value of its future free cash flows. AEP’s free cash flow (“FCF”) per share for the trailing twelve months was -0.38. Comparatively, WEC’s free cash flow per share was -0.64. On a percent-of-sales basis, AEP’s free cash flow was -1.14% while WEC converted -2.7% of its revenues into cash flow. This means that, for a given level of sales, AEP is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. AEP has a current ratio of 0.60 compared to 0.60 for WEC. This means that AEP can more easily cover its most immediate liabilities over the next twelve months. AEP’s debt-to-equity ratio is 1.20 versus a D/E of 1.14 for WEC. AEP is therefore the more solvent of the two companies, and has lower financial risk.
AEP trades at a forward P/E of 17.69, a P/B of 1.87, and a P/S of 2.20, compared to a forward P/E of 19.38, a P/B of 2.18, and a P/S of 2.67 for WEC. AEP 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. AEP is currently priced at a -9.24% to its one-year price target of 75.73. Comparatively, WEC is -5.46% relative to its price target of 67.25. This suggests that AEP 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 2.50 for AEP and 2.50 for WEC, which implies that analysts are equally bullish on their outlook for the two stocks.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. AEP has a beta of 0.25 and WEC’s beta is 0.09. WEC’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. AEP has a short ratio of 3.06 compared to a short interest of 5.97 for WEC. This implies that the market is currently less bearish on the outlook for AEP.
American Electric Power Company, Inc. (NYSE:AEP) beats WEC Energy Group, Inc. (NYSE:WEC) on a total of 8 of the 14 factors compared between the two stocks. AEP has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, AEP is the cheaper of the two stocks on an earnings, book value and sales basis, AEP is more undervalued relative to its price target. Finally, AEP has better sentiment signals based on short interest.