The AES Corporation (NYSE:AES), on the other hand, is up 1.20% year to date as of 01/10/2018. It currently trades at $10.96 and has returned 1.20% during the past week.
Calpine Corporation (NYSE:CPN) and The AES Corporation (NYSE:AES) 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.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect CPN to grow earnings at a 1.70% annual rate over the next 5 years. Comparatively, AES is expected to grow at a 8.40% annual rate. All else equal, AES’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 11.86% for The AES Corporation (AES). CPN’s ROI is 5.00% while AES has a ROI of 1.40%. The interpretation is that CPN’s business generates a higher return on investment than AES’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 +1.37. Comparatively, AES’s free cash flow per share was +0.29. On a percent-of-sales basis, CPN’s free cash flow was 7.35% while AES converted 1.41% 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
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. CPN has a current ratio of 1.30 compared to 1.00 for AES. This means that CPN can more easily cover its most immediate liabilities over the next twelve months. CPN’s debt-to-equity ratio is 3.59 versus a D/E of 6.92 for AES. AES is therefore the more solvent of the two companies, and has lower financial risk.
CPN trades at a forward P/E of 17.84, a P/B of 1.65, and a P/S of 0.64, compared to a forward P/E of 9.21, a P/B of 2.27, and a P/S of 0.51 for AES. CPN is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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 isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. CPN is currently priced at a 4.07% to its one-year price target of 14.50. Comparatively, AES is -13.77% relative to its price target of 12.71. This suggests that AES 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 2.80 for CPN and 2.30 for AES, which implies that analysts are more bullish on the outlook for CPN.
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 AES’s beta is 1.25. CPN’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 3.27 compared to a short interest of 2.21 for AES. This implies that the market is currently less bearish on the outlook for AES.
Calpine Corporation (NYSE:CPN) beats The AES Corporation (NYSE:AES) on a total of 8 of the 14 factors compared between the two stocks. CPN 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. Finally, TWX has better sentiment signals based on short interest.