Duke Energy Corporation (NYSE:DUK) shares are down more than -5.74% this year and recently decreased -1.04% or -$0.83 to settle at $79.28. Dynegy Inc. (NYSE:DYN), on the other hand, is up 0.51% year to date as of 01/10/2018. It currently trades at $11.91 and has returned 1.10% during the past week.
Duke Energy Corporation (NYSE:DUK) and Dynegy Inc. (NYSE:DYN) 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.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect DUK to grow earnings at a 3.23% 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 16.41% for Dynegy Inc. (DYN). DUK’s ROI is 4.50% while DYN has a ROI of -6.50%. The interpretation is that DUK’s business generates a higher return on investment than DYN’s.
The value of a stock is simply the present value of its future free cash flows. DUK’s free cash flow (“FCF”) per share for the trailing twelve months was -0.40. Comparatively, DYN’s free cash flow per share was +1.48. On a percent-of-sales basis, DUK’s free cash flow was -1.23% while DYN converted 4.94% of its revenues into cash flow. This means that, for a given level of sales, DYN is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. DUK has a current ratio of 0.70 compared to 2.00 for DYN. This means that DYN can more easily cover its most immediate liabilities over the next twelve months. DUK’s debt-to-equity ratio is 1.28 versus a D/E of 5.50 for DYN. DYN is therefore the more solvent of the two companies, and has lower financial risk.
DUK trades at a forward P/E of 16.41, a P/B of 1.33, and a P/S of 2.47, compared to a forward P/E of 41.07, a P/B of 1.15, and a P/S of 0.31 for DYN. DUK is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B 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
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. DUK is currently priced at a -10.16% to its one-year price target of 88.25. Comparatively, DYN is -3.33% relative to its price target of 12.32. This suggests that DUK 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 2.90 for DUK and 2.40 for DYN, which implies that analysts are more bullish on the outlook for DUK.
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. DUK has a beta of 0.20 and DYN’s beta is 1.93. DUK’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. DUK has a short ratio of 3.37 compared to a short interest of 3.60 for DYN. This implies that the market is currently less bearish on the outlook for DUK.
Duke Energy Corporation (NYSE:DUK) beats Dynegy Inc. (NYSE:DYN) on a total of 8 of the 14 factors compared between the two stocks. DUK is growing fastly, is more profitable, generates a higher return on investment and has lower financial risk. DUK is more undervalued relative to its price target. Finally, DUK has better sentiment signals based on short interest.