CMS Energy Corporation (NYSE:CMS) shares are up more than 18.48% this year and recently increased 0.22% or $0.11 to settle at $49.42. Ameren Corporation (NYSE:AEE), on the other hand, is up 19.10% year to date as of 12/05/2017. It currently trades at $62.66 and has returned -2.15% during the past week.
CMS Energy Corporation (NYSE:CMS) and Ameren Corporation (NYSE:AEE) 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.
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 CMS to grow earnings at a 7.44% annual rate over the next 5 years. Comparatively, AEE is expected to grow at a 7.00% annual rate. All else equal, CMS’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 42.46% for Ameren Corporation (AEE). CMS’s ROI is 7.20% while AEE has a ROI of 6.70%. The interpretation is that CMS’s business generates a higher return on investment than AEE’s.
Cash is king when it comes to investing. CMS’s free cash flow (“FCF”) per share for the trailing twelve months was -1.69. Comparatively, AEE’s free cash flow per share was +0.60. On a percent-of-sales basis, CMS’s free cash flow was -7.45% while AEE converted 2.4% of its revenues into cash flow. This means that, for a given level of sales, AEE 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. CMS has a current ratio of 0.90 compared to 0.60 for AEE. This means that CMS can more easily cover its most immediate liabilities over the next twelve months. CMS’s debt-to-equity ratio is 2.28 versus a D/E of 1.11 for AEE. CMS is therefore the more solvent of the two companies, and has lower financial risk.
CMS trades at a forward P/E of 21.17, a P/B of 3.05, and a P/S of 2.15, compared to a forward P/E of 20.68, a P/B of 2.06, and a P/S of 2.47 for AEE. CMS is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. 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. CMS is currently priced at a -1.65% to its one-year price target of 50.25. Comparatively, AEE is 5.24% relative to its price target of 59.54. This suggests that CMS 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 CMS and 2.70 for AEE, which implies that analysts are more bullish on the outlook for AEE.
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. CMS has a beta of 0.18 and AEE’s beta is 0.39. CMS’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. CMS has a short ratio of 2.57 compared to a short interest of 4.90 for AEE. This implies that the market is currently less bearish on the outlook for CMS.
CMS Energy Corporation (NYSE:CMS) beats Ameren Corporation (NYSE:AEE) on a total of 8 of the 14 factors compared between the two stocks. CMS is growing fastly, generates a higher return on investment and higher liquidity. CMS is more undervalued relative to its price target. Finally, CMS has better sentiment signals based on short interest.