American Electric Power Company, Inc. (NYSE:AEP) shares are up more than 21.14% this year and recently increased 0.67% or $0.51 to settle at $76.78. WEC Energy Group, Inc. (NYSE:WEC), on the other hand, is up 16.35% year to date as of 12/05/2017. It currently trades at $68.53 and has returned -1.00% during the past week.
American Electric Power Company, Inc. (NYSE:AEP) and WEC Energy Group, Inc. (NYSE:WEC) 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.
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 AEP to grow earnings at a 2.77% annual rate over the next 5 years. Comparatively, WEC is expected to grow at a 5.27% annual rate. All else equal, WEC’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 35.9% for WEC Energy Group, Inc. (WEC). AEP’s ROI is 3.30% while WEC has a ROI of 5.80%. The interpretation is that WEC’s business generates a higher return on investment than AEP’s.
The value of a stock is simply the present value of its future free cash flows. AEP’s free cash flow (“FCF”) per share for the trailing twelve months was -0.38. Comparatively, WEC’s free cash flow per share was -0.64. On a percent-of-sales basis, AEP’s free cash flow was -1.14% while WEC converted -2.7% of its revenues into cash flow. This means that, for a given level of sales, AEP 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. AEP has a current ratio of 0.60 compared to 0.60 for WEC. This means that AEP can more easily cover its most immediate liabilities over the next twelve months. AEP’s debt-to-equity ratio is 1.20 versus a D/E of 1.14 for WEC. AEP is therefore the more solvent of the two companies, and has lower financial risk.
AEP trades at a forward P/E of 19.64, a P/B of 2.07, and a P/S of 2.43, compared to a forward P/E of 20.79, a P/B of 2.34, and a P/S of 2.85 for WEC. AEP 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 isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. AEP is currently priced at a 2.83% to its one-year price target of 74.67. Comparatively, WEC is 3.05% relative to its price target of 66.50. This suggests that AEP 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 2.40 for AEP and 2.50 for WEC, which implies that analysts are more bullish on the outlook for WEC.
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. AEP has a beta of 0.29 and WEC’s beta is 0.14. WEC’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. AEP has a short ratio of 2.93 compared to a short interest of 5.27 for WEC. This implies that the market is currently less bearish on the outlook for AEP.
American Electric Power Company, Inc. (NYSE:AEP) beats WEC Energy Group, Inc. (NYSE:WEC) on a total of 9 of the 14 factors compared between the two stocks. AEP has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, AEP is the cheaper of the two stocks on an earnings, book value and sales basis, AEP is more undervalued relative to its price target. Finally, AEP has better sentiment signals based on short interest.