PPL Corporation (NYSE:PPL) shares are up more than 3.64% this year and recently increased 0.24% or $0.09 to settle at $35.38. Vistra Energy Corp. (NYSE:VST), on the other hand, is up 14.90% year to date as of 12/05/2017. It currently trades at $17.61 and has returned -7.38% during the past week.
PPL Corporation (NYSE:PPL) and Vistra Energy Corp. (NYSE:VST) 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect PPL to grow earnings at a -0.03% annual rate over the next 5 years.
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. PPL Corporation (PPL) has an EBITDA margin of 53.79%. This suggests that PPL underlying business is more profitable PPL’s ROI is 8.20% while VST has a ROI of 212.30%. The interpretation is that VST’s business generates a higher return on investment than PPL’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. PPL’s free cash flow (“FCF”) per share for the trailing twelve months was -0.12. Comparatively, VST’s free cash flow per share was +0.26. On a percent-of-sales basis, PPL’s free cash flow was -1.1% while VST converted 2.16% of its revenues into cash flow. This means that, for a given level of sales, VST 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. PPL has a current ratio of 0.60 compared to 2.20 for VST. This means that VST can more easily cover its most immediate liabilities over the next twelve months. PPL’s debt-to-equity ratio is 1.94 versus a D/E of 0.66 for VST. PPL is therefore the more solvent of the two companies, and has lower financial risk.
PPL trades at a forward P/E of 15.15, a P/B of 2.27, and a P/S of 3.30, compared to a forward P/E of 16.45, a P/B of 1.10, and a P/S of 1.36 for VST. PPL is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S 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
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. PPL is currently priced at a -10.84% to its one-year price target of 39.68. Comparatively, VST is -16.97% relative to its price target of 21.21. This suggests that VST 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 2.60 for PPL and 2.00 for VST, which implies that analysts are more bullish on the outlook for PPL.
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. PPL has a short ratio of 2.79 compared to a short interest of 4.31 for VST. This implies that the market is currently less bearish on the outlook for PPL.
Vistra Energy Corp. (NYSE:VST) beats PPL Corporation (NYSE:PPL) on a total of 11 of the 14 factors compared between the two stocks. VST is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, VST is the cheaper of the two stocks on book value and sales basis, VST is more undervalued relative to its price target. Finally, ETR has better sentiment signals based on short interest.