Consolidated Edison, Inc. (NYSE:ED) shares are down more than -5.37% this year and recently decreased -0.65% or -$0.53 to settle at $80.39. Ameren Corporation (NYSE:AEE), on the other hand, is down -4.81% year to date as of 01/10/2018. It currently trades at $56.15 and has returned -2.23% during the past week.
Consolidated Edison, Inc. (NYSE:ED) and Ameren Corporation (NYSE:AEE) 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.
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 ED to grow earnings at a 3.23% annual rate over the next 5 years. Comparatively, AEE is expected to grow at a 7.00% annual rate. All else equal, AEE’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 42.46% for Ameren Corporation (AEE). ED’s ROI is 6.20% while AEE has a ROI of 6.70%. The interpretation is that AEE’s business generates a higher return on investment than ED’s.
Cash is king when it comes to investing. ED’s free cash flow (“FCF”) per share for the trailing twelve months was -1.08. Comparatively, AEE’s free cash flow per share was +0.60. On a percent-of-sales basis, ED’s free cash flow was -2.77% while AEE converted 2.4% of its revenues into cash flow. This means that, for a given level of sales, AEE 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. ED has a current ratio of 0.80 compared to 0.60 for AEE. This means that ED can more easily cover its most immediate liabilities over the next twelve months. ED’s debt-to-equity ratio is 1.04 versus a D/E of 1.11 for AEE. AEE is therefore the more solvent of the two companies, and has lower financial risk.
ED trades at a forward P/E of 18.89, a P/B of 1.64, and a P/S of 2.12, compared to a forward P/E of 18.63, a P/B of 1.85, and a P/S of 2.22 for AEE. 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. ED is currently priced at a -1.75% to its one-year price target of 81.82. Comparatively, AEE is -5.69% relative to its price target of 59.54. This suggests that AEE 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 3.40 for ED and 2.80 for AEE, which implies that analysts are more bullish on the outlook for ED.
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. ED has a beta of 0.08 and AEE’s beta is 0.36. ED’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. ED has a short ratio of 5.76 compared to a short interest of 5.33 for AEE. This implies that the market is currently less bearish on the outlook for AEE.
Ameren Corporation (NYSE:AEE) beats Consolidated Edison, Inc. (NYSE:ED) on a total of 9 of the 14 factors compared between the two stocks. AEE higher liquidity, is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. AEE is more undervalued relative to its price target. Finally, AEE has better sentiment signals based on short interest.