Earnings

Critical Comparison: NextEra Energy, Inc. (NEE) vs. Xcel Energy Inc. (XEL)

NextEra Energy, Inc. (NYSE:NEE) shares are up more than 30.29% this year and recently increased 1.12% or $1.75 to settle at $157.39. Xcel Energy Inc. (NYSE:XEL), on the other hand, is up 24.82% year to date as of 12/05/2017. It currently trades at $51.13 and has returned -0.88% during the past week.

NextEra Energy, Inc. (NYSE:NEE) and Xcel Energy Inc. (NYSE:XEL) 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.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect NEE to grow earnings at a 7.97% annual rate over the next 5 years. Comparatively, XEL is expected to grow at a 5.99% annual rate. All else equal, NEE’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 33.32% for Xcel Energy Inc. (XEL). NEE’s ROI is 5.80% while XEL has a ROI of 6.30%. The interpretation is that XEL’s business generates a higher return on investment than NEE’s.

Cash Flow 




Cash is king when it comes to investing. NEE’s free cash flow (“FCF”) per share for the trailing twelve months was +0.96. Comparatively, XEL’s free cash flow per share was +0.22. On a percent-of-sales basis, NEE’s free cash flow was 2.8% while XEL converted 1.01% of its revenues into cash flow. This means that, for a given level of sales, NEE is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. NEE has a current ratio of 0.60 compared to 0.90 for XEL. This means that XEL can more easily cover its most immediate liabilities over the next twelve months. NEE’s debt-to-equity ratio is 1.32 versus a D/E of 1.35 for XEL. XEL is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

NEE trades at a forward P/E of 21.44, a P/B of 2.77, and a P/S of 4.33, compared to a forward P/E of 20.78, a P/B of 2.26, and a P/S of 2.27 for XEL. NEE 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

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. NEE is currently priced at a -1.37% to its one-year price target of 159.58. Comparatively, XEL is -16.34% relative to its price target of 61.12. This suggests that XEL 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 1.80 for NEE and 5.00 for XEL, which implies that analysts are more bullish on the outlook for XEL.

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. NEE has a beta of 0.31 and XEL’s beta is 0.23. XEL’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.NEE has a short ratio of 3.94 compared to a short interest of 4.25 for XEL. This implies that the market is currently less bearish on the outlook for NEE.

Summary

Xcel Energy Inc. (NYSE:XEL) beats NextEra Energy, Inc. (NYSE:NEE) on a total of 7 of the 14 factors compared between the two stocks. XEL is growing fastly and higher liquidity. In terms of valuation, XEL is the cheaper of the two stocks on an earnings, book value and sales basis, XEL is more undervalued relative to its price target. Finally, AEP has better sentiment signals based on short interest.

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