CMS Energy Corporation (NYSE:CMS) shares are down more than -6.15% this year and recently decreased -1.31% or -$0.59 to settle at $44.39. Entergy Corporation (NYSE:ETR), on the other hand, is down -2.73% year to date as of 01/10/2018. It currently trades at $79.17 and has returned -1.70% during the past week.
CMS Energy Corporation (NYSE:CMS) and Entergy Corporation (NYSE:ETR) 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 CMS to grow earnings at a 7.44% annual rate over the next 5 years. Comparatively, ETR is expected to grow at a -5.38% annual rate. All else equal, CMS’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 3.03% for Entergy Corporation (ETR). CMS’s ROI is 7.20% while ETR has a ROI of -0.30%. The interpretation is that CMS’s business generates a higher return on investment than ETR’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. CMS’s free cash flow (“FCF”) per share for the trailing twelve months was -1.69. Comparatively, ETR’s free cash flow per share was -1.03. On a percent-of-sales basis, CMS’s free cash flow was -7.45% while ETR converted -1.71% of its revenues into cash flow. This means that, for a given level of sales, ETR 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. CMS has a current ratio of 0.90 compared to 0.80 for ETR. This means that CMS can more easily cover its most immediate liabilities over the next twelve months. CMS’s debt-to-equity ratio is 2.28 versus a D/E of 1.87 for ETR. CMS is therefore the more solvent of the two companies, and has lower financial risk.
CMS trades at a forward P/E of 19.06, a P/B of 2.75, and a P/S of 1.96, compared to a forward P/E of 15.56, a P/B of 1.64, and a P/S of 1.29 for ETR. CMS is the expensive 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. CMS is currently priced at a -11.89% to its one-year price target of 50.38. Comparatively, ETR is -10.35% relative to its price target of 88.31. 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 2.30 for CMS and 2.60 for ETR, which implies that analysts are more bullish on the outlook for ETR.
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. CMS has a beta of 0.14 and ETR’s beta is 0.55. CMS’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. CMS has a short ratio of 3.17 compared to a short interest of 3.31 for ETR. This implies that the market is currently less bearish on the outlook for CMS.
Entergy Corporation (NYSE:ETR) beats CMS Energy Corporation (NYSE:CMS) on a total of 7 of the 14 factors compared between the two stocks. ETR is growing fastly, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, ETR is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, SCG has better sentiment signals based on short interest.