PG&E Corporation (NYSE:PCG) shares are down more than -11.80% this year and recently decreased -0.20% or -$0.11 to settle at $53.49. Consolidated Edison, Inc. (NYSE:ED), on the other hand, is up 19.46% year to date as of 12/05/2017. It currently trades at $88.52 and has returned 0.05% during the past week.
PG&E Corporation (NYSE:PCG) and Consolidated Edison, Inc. (NYSE:ED) 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.
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 PCG to grow earnings at a 2.08% annual rate over the next 5 years. Comparatively, ED is expected to grow at a 3.23% annual rate. All else equal, ED’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 30.83% for Consolidated Edison, Inc. (ED). PCG’s ROI is 5.80% while ED has a ROI of 6.20%. The interpretation is that ED’s business generates a higher return on investment than PCG’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. PCG’s free cash flow (“FCF”) per share for the trailing twelve months was +0.49. Comparatively, ED’s free cash flow per share was -1.08. On a percent-of-sales basis, PCG’s free cash flow was 1.43% while ED converted -2.77% of its revenues into cash flow. This means that, for a given level of sales, PCG 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. PCG has a current ratio of 0.90 compared to 0.80 for ED. This means that PCG can more easily cover its most immediate liabilities over the next twelve months. PCG’s debt-to-equity ratio is 0.96 versus a D/E of 1.04 for ED. ED is therefore the more solvent of the two companies, and has lower financial risk.
PCG trades at a forward P/E of 14.05, a P/B of 1.44, and a P/S of 1.58, compared to a forward P/E of 20.68, a P/B of 1.79, and a P/S of 2.30 for ED. PCG 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. PCG is currently priced at a -17.81% to its one-year price target of 65.08. Comparatively, ED is 10.03% relative to its price target of 80.45. This suggests that PCG 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 PCG and 3.40 for ED, which implies that analysts are more bullish on the outlook for ED.
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. PCG has a beta of 0.18 and ED’s beta is 0.09. ED’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. PCG has a short ratio of 1.17 compared to a short interest of 6.53 for ED. This implies that the market is currently less bearish on the outlook for PCG.
PG&E Corporation (NYSE:PCG) beats Consolidated Edison, Inc. (NYSE:ED) on a total of 10 of the 14 factors compared between the two stocks. PCG has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, PCG is the cheaper of the two stocks on an earnings, book value and sales basis, PCG is more undervalued relative to its price target. Finally, PCG has better sentiment signals based on short interest.