The AES Corporation (NYSE:AES) shares are down more than -1.48% this year and recently decreased -0.65% or -$0.07 to settle at $10.67. Lowe’s Companies, Inc. (NYSE:LOW), on the other hand, is down -7.32% year to date as of 03/13/2018. It currently trades at $86.14 and has returned -1.12% during the past week.
The AES Corporation (NYSE:AES) and Lowe’s Companies, Inc. (NYSE:LOW) are the two most active stocks in the market based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
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 AES to grow earnings at a 8.20% annual rate over the next 5 years. Comparatively, LOW is expected to grow at a 16.62% annual rate. All else equal, LOW’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. EBITDA margin of 10.45% for Lowe’s Companies, Inc. (LOW). AES’s ROI is -0.80% while LOW has a ROI of 16.90%. The interpretation is that LOW’s business generates a higher return on investment than AES’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. AES’s free cash flow (“FCF”) per share for the trailing twelve months was +0.29. Comparatively, LOW’s free cash flow per share was -0.43. On a percent-of-sales basis, AES’s free cash flow was 1.82% while LOW converted -0.52% of its revenues into cash flow. This means that, for a given level of sales, AES 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. AES has a current ratio of 1.10 compared to 1.00 for LOW. This means that AES can more easily cover its most immediate liabilities over the next twelve months. AES’s debt-to-equity ratio is 8.10 versus a D/E of 2.79 for LOW. AES is therefore the more solvent of the two companies, and has lower financial risk.
AES trades at a forward P/E of 8.18, a P/B of 2.86, and a P/S of 0.67, compared to a forward P/E of 13.98, a P/B of 12.47, and a P/S of 1.04 for LOW. AES 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
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. AES is currently priced at a -16.05% to its one-year price target of 12.71. Comparatively, LOW is -18.53% relative to its price target of 105.73. This suggests that LOW 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 2.30 for AES and 2.00 for LOW, which implies that analysts are more bullish on the outlook for AES.
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. AES has a beta of 1.24 and LOW’s beta is 1.32. AES’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.AES has a short ratio of 1.93 compared to a short interest of 1.14 for LOW. This implies that the market is currently less bearish on the outlook for LOW.
Lowe’s Companies, Inc. (NYSE:LOW) beats The AES Corporation (NYSE:AES) on a total of 7 of the 14 factors compared between the two stocks. LOW has higher cash flow per share, is more profitable, generates a higher return on investment and has lower financial risk. In terms of valuation, AES is the cheaper of the two stocks on an earnings, book value and sales basis, LOW is more undervalued relative to its price target. Finally, LOW has better sentiment signals based on short interest.