Choosing Between Calpine Corporation (CPN) and The AES Corporation (AES)

Calpine Corporation (NYSE:CPN) and The AES Corporation (NYSE:AES) 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 CPN to grow earnings at a 1.70% annual rate over the next 5 years. Comparatively, AES is expected to grow at a 9.80% annual rate. All else equal, AES’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Calpine Corporation (CPN) has an EBITDA margin of 20.3%, compared to an EBITDA margin of 11.68% for The AES Corporation (AES). This suggests that CPN underlying business is more profitable. CPN’s ROI is 5.00% while AES has a ROI of 1.40%. The interpretation is that CPN’s business generates a higher return on investment than AES’s.

Cash Flow 

The amount of free cash flow available to investors is ultimately what determines the value of a stock. CPN’s free cash flow (“FCF”) per share for the trailing twelve months was +0.15. Comparatively, AES’s free cash flow per share was -0.72. On a percent-of-sales basis, CPN’s free cash flow was 0.81% while AES converted -3.5% of its revenues into cash flow. This means that, for a given level of sales, CPN is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. CPN has a current ratio of 1.10 compared to 1.00 for AES. This means that CPN can more easily cover its most immediate liabilities over the next twelve months. CPN’s debt-to-equity ratio is 3.98 versus a D/E of 6.87 for AES. AES is therefore the more solvent of the two companies, and has lower financial risk.


CPN trades at a forward P/E of 17.52, a P/B of 1.74, and a P/S of 0.63, compared to a forward P/E of 9.26, a P/B of 2.46, and a P/S of 0.53 for AES. CPN is the cheaper of the two stocks on book value basis but is expensive in terms of P/E 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

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. CPN is currently priced at a -2% to its one-year price target of $15.00. Comparatively, AES is -14.31% relative to its price target of $13.14. This suggests that AES 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 2.50 for CPN and 2.40 for AES, which implies that analysts are more bullish on the outlook for CPN.

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. CPN has a beta of 1.04 and AES’s beta is 1.25. CPN’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. CPN has a short ratio of 2.01 compared to a short interest of 1.67 for AES. This implies that the market is currently less bearish on the outlook for AES.


Calpine Corporation (NYSE:CPN) beats The AES Corporation (NYSE:AES) on a total of 8 of the 14 factors compared between the two stocks. CPN 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. Finally, GXP has better sentiment signals based on short interest.

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