The AES Corporation (NYSE:AES) shares are down more than -7.75% this year and recently increased 1.63% or $0.18 to settle at $10.90. SCANA Corporation (NYSE:SCG), on the other hand, is down -40.64% year to date as of 12/05/2017. It currently trades at $43.63 and has returned -0.05% during the past week.
The AES Corporation (NYSE:AES) and SCANA Corporation (NYSE:SCG) are the two most active stocks in the Electric 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.
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 AES to grow earnings at a 8.40% annual rate over the next 5 years. Comparatively, SCG is expected to grow at a 5.50% annual rate. All else equal, AES’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., compared to an EBITDA margin of -3655.81% for SCANA Corporation (SCG). AES’s ROI is 1.40% while SCG has a ROI of 6.70%. The interpretation is that SCG’s business generates a higher return on investment than AES’s.
Cash is king when it comes to investing. AES’s free cash flow (“FCF”) per share for the trailing twelve months was +0.29. Comparatively, SCG’s free cash flow per share was +0.08. On a percent-of-sales basis, AES’s free cash flow was 1.41% while SCG converted 0.27% 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 1.00 compared to 0.90 for SCG. This means that AES can more easily cover its most immediate liabilities over the next twelve months. AES’s debt-to-equity ratio is 6.92 versus a D/E of 1.32 for SCG. AES is therefore the more solvent of the two companies, and has lower financial risk.
AES trades at a forward P/E of 9.04, a P/B of 2.22, and a P/S of 0.50, compared to a forward P/E of 14.49, a P/B of 1.07, and a P/S of 1.46 for SCG. 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. AES is currently priced at a -14.51% to its one-year price target of 12.75. Comparatively, SCG is -10.04% relative to its price target of 48.50. 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 2.30 for AES and 3.10 for SCG, which implies that analysts are more bullish on the outlook for SCG.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. AES has a beta of 1.23 and SCG’s beta is 0.23. SCG’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. AES has a short ratio of 1.63 compared to a short interest of 2.13 for SCG. This implies that the market is currently less bearish on the outlook for AES.
The AES Corporation (NYSE:AES) beats SCANA Corporation (NYSE:SCG) on a total of 10 of the 14 factors compared between the two stocks. AES is growing fastly, is more profitable, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, AES is the cheaper of the two stocks on an earnings and sales basis, AES is more undervalued relative to its price target. Finally, AES has better sentiment signals based on short interest.