Public Service Enterprise Group Incorporated (NYSE:PEG) shares are down more than -2.91% this year and recently increased 1.21% or $0.6 to settle at $50.00. Sempra Energy (NYSE:SRE), on the other hand, is down -0.21% year to date as of 01/11/2018. It currently trades at $106.70 and has returned -0.67% during the past week.
Public Service Enterprise Group Incorporated (NYSE:PEG) and Sempra Energy (NYSE:SRE) are the two most active stocks in the Diversified Utilities industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect PEG to grow earnings at a 1.43% annual rate over the next 5 years. Comparatively, SRE is expected to grow at a 9.85% annual rate. All else equal, SRE’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. Public Service Enterprise Group Incorporated (PEG) has an EBITDA margin of 41.87%. This suggests that PEG underlying business is more profitable PEG’s ROI is 4.60% while SRE has a ROI of 3.90%. The interpretation is that PEG’s business generates a higher return on investment than SRE’s.
Cash is king when it comes to investing. PEG’s free cash flow (“FCF”) per share for the trailing twelve months was -0.60. Comparatively, SRE’s free cash flow per share was -1.75. On a percent-of-sales basis, PEG’s free cash flow was -3.35% while SRE converted -4.32% of its revenues into cash flow. This means that, for a given level of sales, PEG 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. PEG has a current ratio of 0.80 compared to 0.40 for SRE. This means that PEG can more easily cover its most immediate liabilities over the next twelve months. PEG’s debt-to-equity ratio is 0.97 versus a D/E of 1.41 for SRE. SRE is therefore the more solvent of the two companies, and has lower financial risk.
PEG trades at a forward P/E of 16.87, a P/B of 1.92, and a P/S of 2.76, compared to a forward P/E of 19.21, a P/B of 2.02, and a P/S of 2.40 for SRE. 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 is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. PEG is currently priced at a -6% to its one-year price target of 53.19. Comparatively, SRE is -12.46% relative to its price target of 121.89. This suggests that SRE 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 2.10 for PEG and 2.10 for SRE, which implies that analysts are equally bullish on their outlook for the two stocks.
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. PEG has a beta of 0.44 and SRE’s beta is 0.61. PEG’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. PEG has a short ratio of 2.34 compared to a short interest of 4.12 for SRE. This implies that the market is currently less bearish on the outlook for PEG.
Public Service Enterprise Group Incorporated (NYSE:PEG) beats Sempra Energy (NYSE:SRE) on a total of 10 of the 14 factors compared between the two stocks. PEG 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. In terms of valuation, PEG is the cheaper of the two stocks on an earnings and book value, Finally, PEG has better sentiment signals based on short interest.