Hawaiian Electric Industries, Inc. (NYSE:HE) shares are down more than -4.59% this year and recently decreased -0.32% or -$0.11 to settle at $34.49. NRG Yield, Inc. (NYSE:NYLD), on the other hand, is down -0.53% year to date as of 01/10/2018. It currently trades at $18.80 and has returned -0.53% during the past week.
Hawaiian Electric Industries, Inc. (NYSE:HE) and NRG Yield, Inc. (NYSE:NYLD) 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 HE to grow earnings at a 6.20% annual rate over the next 5 years.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. 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 56.74% for NRG Yield, Inc. (NYLD).
The amount of free cash flow available to investors is ultimately what determines the value of a stock. HE’s free cash flow (“FCF”) per share for the trailing twelve months was -0.20. Comparatively, NYLD’s free cash flow per share was +1.19. On a percent-of-sales basis, HE’s free cash flow was -0.91% while NYLD converted 21.52% of its revenues into cash flow. This means that, for a given level of sales, NYLD is able to generate more free cash flow for investors.
HE trades at a forward P/E of 18.90, a P/B of 1.78, and a P/S of 1.49, compared to a forward P/E of 16.07, a P/B of 1.00, and a P/S of 1.22 for NYLD. HE 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
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. HE is currently priced at a -0.75% to its one-year price target of 34.75. Comparatively, NYLD is -2.99% relative to its price target of 19.38. This suggests that NYLD 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 HE and 2.20 for NYLD, which implies that analysts are more bullish on the outlook for HE.
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. HE has a short ratio of 11.88 compared to a short interest of 4.99 for NYLD. This implies that the market is currently less bearish on the outlook for NYLD.
NRG Yield, Inc. (NYSE:NYLD) beats Hawaiian Electric Industries, Inc. (NYSE:HE) on a total of 11 of the 14 factors compared between the two stocks. NYLD is growing fastly, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, NYLD is the cheaper of the two stocks on an earnings, book value and sales basis, NYLD is more undervalued relative to its price target. Finally, NYLD has better sentiment signals based on short interest.