PG&E Corporation (NYSE:PCG) shares are down more than -2.12% this year and recently decreased -1.50% or -$0.67 to settle at $43.88. Edison International (NYSE:EIX), on the other hand, is down -1.45% year to date as of 01/10/2018. It currently trades at $62.32 and has returned 0.05% during the past week.
PG&E Corporation (NYSE:PCG) and Edison International (NYSE:EIX) 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.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect PCG to grow earnings at a 2.08% annual rate over the next 5 years. Comparatively, EIX is expected to grow at a 3.84% annual rate. All else equal, EIX’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 31.38% for Edison International (EIX). PCG’s ROI is 5.80% while EIX has a ROI of 7.80%. The interpretation is that EIX’s business generates a higher return on investment than PCG’s.
If there’s one thing investors care more about than earnings, it’s cash flow. PCG’s free cash flow (“FCF”) per share for the trailing twelve months was +0.49. Comparatively, EIX’s free cash flow per share was +0.52. On a percent-of-sales basis, PCG’s free cash flow was 1.43% while EIX converted 1.43% of its revenues into cash flow. This means that, for a given level of sales, PCG 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. PCG has a current ratio of 0.90 compared to 0.50 for EIX. This means that PCG can more easily cover its most immediate liabilities over the next twelve months. PCG’s debt-to-equity ratio is 0.96 versus a D/E of 1.06 for EIX. EIX is therefore the more solvent of the two companies, and has lower financial risk.
PCG trades at a forward P/E of 11.51, a P/B of 1.18, and a P/S of 1.25, compared to a forward P/E of 14.57, a P/B of 1.64, and a P/S of 1.70 for EIX. PCG is the cheaper 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. PCG is currently priced at a -20.67% to its one-year price target of 55.31. Comparatively, EIX is -18.82% relative to its price target of 76.77. This suggests that PCG 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 PCG and 2.40 for EIX, which implies that analysts are more bullish on the outlook for PCG.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. PCG has a beta of 0.11 and EIX’s beta is 0.21. PCG’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. PCG has a short ratio of 0.97 compared to a short interest of 1.55 for EIX. This implies that the market is currently less bearish on the outlook for PCG.
PG&E Corporation (NYSE:PCG) beats Edison International (NYSE:EIX) on a total of 8 of the 14 factors compared between the two stocks. PCG higher liquidity and has lower financial risk. In terms of valuation, PCG is the cheaper of the two stocks on an earnings, book value and sales basis, PCG is more undervalued relative to its price target. Finally, PCG has better sentiment signals based on short interest.