Earnings

Comparing Banco Santander, S.A. (SAN) and NRG Energy, Inc. (NRG)

Banco Santander, S.A. (NYSE:SAN) shares are up more than 2.91% this year and recently decreased -0.59% or -$0.04 to settle at $6.73. NRG Energy, Inc. (NYSE:NRG), on the other hand, is up 5.34% year to date as of 03/13/2018. It currently trades at $30.00 and has returned 2.70% during the past week.

Banco Santander, S.A. (NYSE:SAN) and NRG Energy, Inc. (NYSE:NRG) are the two most active stocks in the market 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.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect SAN to grow earnings at a 10.22% annual rate over the next 5 years. Comparatively, NRG is expected to grow at a 75.33% annual rate. All else equal, NRG’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. EBITDA margin of 4.58% for NRG Energy, Inc. (NRG). SAN’s ROI is 6.80% while NRG has a ROI of 7.30%. The interpretation is that NRG’s business generates a higher return on investment than SAN’s.

Cash Flow 




Cash is king when it comes to investing. On a percent-of-sales basis, SAN’s free cash flow was 0% while NRG converted 4.69% of its revenues into cash flow. This means that, for a given level of sales, NRG is able to generate more free cash flow for investors.

Valuation

SAN trades at a P/B of 0.92, and a P/S of 1.58, compared to a forward P/E of 12.22, and a P/S of 0.89 for NRG. SAN 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. SAN is currently priced at a -10.74% to its one-year price target of 7.54. Comparatively, NRG is -12.41% relative to its price target of 34.25. This suggests that NRG 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 3.00 for SAN and 1.80 for NRG, which implies that analysts are more bullish on the outlook for SAN.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. SAN has a beta of 1.60 and NRG’s beta is 1.07. NRG’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. SAN has a short ratio of 1.72 compared to a short interest of 2.94 for NRG. This implies that the market is currently less bearish on the outlook for SAN.

Summary

NRG Energy, Inc. (NYSE:NRG) beats Banco Santander, S.A. (NYSE:SAN) on a total of 12 of the 14 factors compared between the two stocks. NRG , 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, NRG is the cheaper of the two stocks on book value and sales basis, NRG is more undervalued relative to its price target.

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