Calpine Corporation (NYSE:CPN) shares are up more than 31.67% this year and recently increased 0.22% or $0.03 to settle at $15.08. The Southern Company (NYSE:SO), on the other hand, is up 2.38% year to date as of 12/05/2017. It currently trades at $50.70 and has returned -2.19% during the past week.
Calpine Corporation (NYSE:CPN) and The Southern Company (NYSE:SO) are the two most active stocks in the Electric Utilities industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
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, SO is expected to grow at a 2.60% annual rate. All else equal, SO’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 16.84% for The Southern Company (SO). CPN’s ROI is 5.00% while SO has a ROI of 5.10%. The interpretation is that SO’s business generates a higher return on investment than CPN’s.
The value of a stock is simply the present value of its future free cash flows. CPN’s free cash flow (“FCF”) per share for the trailing twelve months was +1.37. Comparatively, SO’s free cash flow per share was +0.00. On a percent-of-sales basis, CPN’s free cash flow was 7.35% while SO converted 0% 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
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. CPN has a current ratio of 1.30 compared to 0.70 for SO. This means that CPN can more easily cover its most immediate liabilities over the next twelve months. CPN’s debt-to-equity ratio is 3.59 versus a D/E of 2.08 for SO. CPN is therefore the more solvent of the two companies, and has lower financial risk.
CPN trades at a forward P/E of 17.75, a P/B of 1.65, and a P/S of 0.64, compared to a forward P/E of 16.60, a P/B of 2.10, and a P/S of 2.23 for SO. 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. CPN is currently priced at a 4% to its one-year price target of 14.50. Comparatively, SO is -2.29% relative to its price target of 51.89. This suggests that SO 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 2.80 for CPN and 3.00 for SO, which implies that analysts are more bullish on the outlook for SO.
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 1.07 and SO’s beta is 0.16. SO’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. CPN has a short ratio of 1.86 compared to a short interest of 4.96 for SO. This implies that the market is currently less bearish on the outlook for CPN.
Calpine Corporation (NYSE:CPN) beats The Southern Company (NYSE:SO) on a total of 8 of the 14 factors compared between the two stocks. CPN is more profitable, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, CPN is the cheaper of the two stocks on book value and sales basis, Finally, CPN has better sentiment signals based on short interest.