Edison International (NYSE:EIX) shares are down more than -2.76% this year and recently decreased -2.33% or -$1.63 to settle at $68.37. Dominion Energy, Inc. (NYSE:D), on the other hand, is up 8.53% year to date as of 12/05/2017. It currently trades at $83.60 and has returned -0.98% during the past week.
Edison International (NYSE:EIX) and Dominion Energy, Inc. (NYSE:D) are the two most active stocks in the Electric Utilities industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
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 EIX to grow earnings at a 5.77% annual rate over the next 5 years. Comparatively, D is expected to grow at a 3.64% annual rate. All else equal, EIX’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 52.57% for Dominion Energy, Inc. (D). EIX’s ROI is 7.80% while D has a ROI of 6.00%. The interpretation is that EIX’s business generates a higher return on investment than D’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. EIX’s free cash flow (“FCF”) per share for the trailing twelve months was +0.52. Comparatively, D’s free cash flow per share was -0.95. On a percent-of-sales basis, EIX’s free cash flow was 1.43% while D converted -5.21% of its revenues into cash flow. This means that, for a given level of sales, EIX 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. EIX has a current ratio of 0.50 compared to 0.50 for D. This means that EIX can more easily cover its most immediate liabilities over the next twelve months. EIX’s debt-to-equity ratio is 1.06 versus a D/E of 2.26 for D. D is therefore the more solvent of the two companies, and has lower financial risk.
EIX trades at a forward P/E of 16.37, a P/B of 1.84, and a P/S of 1.91, compared to a forward P/E of 20.63, a P/B of 3.28, and a P/S of 4.29 for D. EIX 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 is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. EIX is currently priced at a -19.09% to its one-year price target of 84.50. Comparatively, D is 2.13% relative to its price target of 81.86. This suggests that EIX 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 EIX and 2.60 for D, which implies that analysts are more bullish on the outlook for D.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. EIX has a beta of 0.26 and D’s beta is 0.28. EIX’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. EIX has a short ratio of 1.94 compared to a short interest of 6.35 for D. This implies that the market is currently less bearish on the outlook for EIX.
Edison International (NYSE:EIX) beats Dominion Energy, Inc. (NYSE:D) on a total of 13 of the 14 factors compared between the two stocks. EIX is growing fastly, 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. In terms of valuation, EIX is the cheaper of the two stocks on an earnings, book value and sales basis, EIX is more undervalued relative to its price target. Finally, EIX has better sentiment signals based on short interest.