Duke Energy Corporation (NYSE:DUK) shares are up more than 13.32% this year and recently increased 0.47% or $0.41 to settle at $88.37. Alliant Energy Corporation (NYSE:LNT), on the other hand, is up 17.02% year to date as of 12/05/2017. It currently trades at $44.60 and has returned -0.98% during the past week.
Duke Energy Corporation (NYSE:DUK) and Alliant Energy Corporation (NYSE:LNT) 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.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect DUK to grow earnings at a 3.23% annual rate over the next 5 years. Comparatively, LNT is expected to grow at a 7.05% annual rate. All else equal, LNT’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. 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 21.75% for Alliant Energy Corporation (LNT). DUK’s ROI is 4.50% while LNT has a ROI of 5.70%. The interpretation is that LNT’s business generates a higher return on investment than DUK’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. DUK’s free cash flow (“FCF”) per share for the trailing twelve months was -0.40. Comparatively, LNT’s free cash flow per share was -0.58. On a percent-of-sales basis, DUK’s free cash flow was -1.23% while LNT converted -4.04% of its revenues into cash flow. This means that, for a given level of sales, DUK is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. DUK has a current ratio of 0.70 compared to 0.50 for LNT. This means that DUK can more easily cover its most immediate liabilities over the next twelve months. DUK’s debt-to-equity ratio is 1.28 versus a D/E of 1.17 for LNT. DUK is therefore the more solvent of the two companies, and has lower financial risk.
DUK trades at a forward P/E of 18.22, a P/B of 1.48, and a P/S of 2.73, compared to a forward P/E of 20.84, a P/B of 2.47, and a P/S of 3.08 for LNT. DUK 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
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”. DUK is currently priced at a -0.35% to its one-year price target of 88.68. Comparatively, LNT is 2.29% relative to its price target of 43.60. This suggests that DUK 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 2.90 for DUK and 2.40 for LNT, which implies that analysts are more bullish on the outlook for DUK.
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. DUK has a beta of 0.26 and LNT’s beta is 0.46. DUK’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. DUK has a short ratio of 3.35 compared to a short interest of 4.98 for LNT. This implies that the market is currently less bearish on the outlook for DUK.
Duke Energy Corporation (NYSE:DUK) beats Alliant Energy Corporation (NYSE:LNT) on a total of 10 of the 14 factors compared between the two stocks. DUK is more profitable, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, DUK is the cheaper of the two stocks on an earnings, book value and sales basis, DUK is more undervalued relative to its price target. Finally, DUK has better sentiment signals based on short interest.