FuelCell Energy, Inc. (NASDAQ:FCEL) shares are up more than 0.57% this year and recently increased 3.69% or $0.07 to settle at $1.83. Pattern Energy Group Inc. (NASDAQ:PEGI), on the other hand, is up 11.32% year to date as of 12/05/2017. It currently trades at $21.01 and has returned -6.00% during the past week.
FuelCell Energy, Inc. (NASDAQ:FCEL) and Pattern Energy Group Inc. (NASDAQ:PEGI) are the two most active stocks in the Diversified Utilities industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider 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 FCEL to grow earnings at a 15.00% annual rate over the next 5 years. Comparatively, PEGI is expected to grow at a 36.70% annual rate. All else equal, PEGI’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. EBITDA margin of 63.89% for Pattern Energy Group Inc. (PEGI). FCEL’s ROI is -21.90% while PEGI has a ROI of -0.30%. The interpretation is that PEGI’s business generates a higher return on investment than FCEL’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. FCEL’s free cash flow (“FCF”) per share for the trailing twelve months was -0.39. Comparatively, PEGI’s free cash flow per share was -0.42. On a percent-of-sales basis, FCEL’s free cash flow was -0.03% while PEGI converted -0.01% of its revenues into cash flow. This means that, for a given level of sales, PEGI 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. FCEL has a current ratio of 2.70 compared to 0.50 for PEGI. This means that FCEL can more easily cover its most immediate liabilities over the next twelve months. FCEL’s debt-to-equity ratio is 1.08 versus a D/E of 2.34 for PEGI. PEGI is therefore the more solvent of the two companies, and has lower financial risk.
FCEL trades at a P/B of 1.01, and a P/S of 1.62, compared to a forward P/E of 58.08, a P/B of 1.98, and a P/S of 5.37 for PEGI. FCEL 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. FCEL is currently priced at a -32.22% to its one-year price target of 2.70. Comparatively, PEGI is -19.19% relative to its price target of 26.00. This suggests that FCEL 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 2.20 for FCEL and 2.10 for PEGI, which implies that analysts are more bullish on the outlook for FCEL.
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. FCEL has a beta of 1.99 and PEGI’s beta is 1.05. PEGI’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. FCEL has a short ratio of 3.01 compared to a short interest of 4.83 for PEGI. This implies that the market is currently less bearish on the outlook for FCEL.
FuelCell Energy, Inc. (NASDAQ:FCEL) beats Pattern Energy Group Inc. (NASDAQ:PEGI) on a total of 8 of the 14 factors compared between the two stocks. FCEL has higher cash flow per share, higher liquidity and has lower financial risk. In terms of valuation, FCEL is the cheaper of the two stocks on an earnings, book value and sales basis, FCEL is more undervalued relative to its price target. Finally, FCEL has better sentiment signals based on short interest.