Earnings

A Side-by-side Analysis of Public Service Enterprise Group Incorporated (PEG) and Exelon Corporation (EXC)

Public Service Enterprise Group Incorporated (NYSE:PEG) shares are up more than 20.05% this year and recently decreased -0.11% or -$0.06 to settle at $52.62. Exelon Corporation (NYSE:EXC), on the other hand, is up 16.23% year to date as of 12/05/2017. It currently trades at $41.08 and has returned -1.69% during the past week.

Public Service Enterprise Group Incorporated (NYSE:PEG) and Exelon Corporation (NYSE:EXC) are the two most active stocks in the Diversified Utilities industry 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 PEG to grow earnings at a 1.48% annual rate over the next 5 years. Comparatively, EXC is expected to grow at a 0.28% annual rate. All else equal, PEG’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 30.41% for Exelon Corporation (EXC). PEG’s ROI is 4.60% while EXC has a ROI of 3.80%. The interpretation is that PEG’s business generates a higher return on investment than EXC’s.

Cash Flow 




The value of a stock is simply the present value of its future free cash flows. PEG’s free cash flow (“FCF”) per share for the trailing twelve months was -0.60. Comparatively, EXC’s free cash flow per share was +0.78. On a percent-of-sales basis, PEG’s free cash flow was -3.35% while EXC converted 2.39% of its revenues into cash flow. This means that, for a given level of sales, EXC 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. PEG has a current ratio of 0.80 compared to 1.00 for EXC. This means that EXC can more easily cover its most immediate liabilities over the next twelve months. PEG’s debt-to-equity ratio is 0.97 versus a D/E of 1.28 for EXC. EXC is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

PEG trades at a forward P/E of 17.82, a P/B of 2.03, and a P/S of 2.92, compared to a forward P/E of 14.31, a P/B of 1.41, and a P/S of 1.20 for EXC. PEG is the expensive 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

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. PEG is currently priced at a 2.17% to its one-year price target of 51.50. Comparatively, EXC is -4.31% relative to its price target of 42.93. This suggests that EXC 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 2.10 for PEG and 1.90 for EXC, which implies that analysts are more bullish on the outlook for PEG.

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. PEG has a beta of 0.43 and EXC’s beta is 0.30. EXC’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.PEG has a short ratio of 2.45 compared to a short interest of 2.70 for EXC. This implies that the market is currently less bearish on the outlook for PEG.

Summary

Exelon Corporation (NYSE:EXC) beats Public Service Enterprise Group Incorporated (NYSE:PEG) on a total of 9 of the 14 factors compared between the two stocks. EXC is growing fastly, has a higher cash conversion rate and higher liquidity. In terms of valuation, EXC is the cheaper of the two stocks on an earnings, book value and sales basis, EXC is more undervalued relative to its price target. Finally, NI has better sentiment signals based on short interest.

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