Sempra Energy (NYSE:SRE) shares are up more than 15.48% this year and recently increased 0.05% or $0.06 to settle at $116.28. NiSource Inc. (NYSE:NI), on the other hand, is up 21.05% year to date as of 12/05/2017. It currently trades at $27.03 and has returned -1.47% during the past week.
Sempra Energy (NYSE:SRE) and NiSource Inc. (NYSE:NI) are the two most active stocks in the Diversified 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 SRE to grow earnings at a 9.85% annual rate over the next 5 years. Comparatively, NI is expected to grow at a 7.65% annual rate. All else equal, SRE’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. EBITDA margin of 27.88% for NiSource Inc. (NI). SRE’s ROI is 3.90% while NI has a ROI of 5.60%. The interpretation is that NI’s business generates a higher return on investment than SRE’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. SRE’s free cash flow (“FCF”) per share for the trailing twelve months was -1.75. Comparatively, NI’s free cash flow per share was -2.00. On a percent-of-sales basis, SRE’s free cash flow was -4.31% while NI converted -14.99% of its revenues into cash flow. This means that, for a given level of sales, SRE 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. SRE has a current ratio of 0.40 compared to 0.50 for NI. This means that NI can more easily cover its most immediate liabilities over the next twelve months. SRE’s debt-to-equity ratio is 1.41 versus a D/E of 1.98 for NI. NI is therefore the more solvent of the two companies, and has lower financial risk.
SRE trades at a forward P/E of 20.95, a P/B of 2.21, and a P/S of 2.62, compared to a forward P/E of 20.87, a P/B of 2.03, and a P/S of 1.85 for NI. SRE is the expensive 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. SRE is currently priced at a -6.75% to its one-year price target of 124.70. Comparatively, NI is -5.02% relative to its price target of 28.46. This suggests that SRE 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 1.90 for SRE and 2.30 for NI, which implies that analysts are more bullish on the outlook for NI.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. SRE has a beta of 0.63 and NI’s beta is 0.31. NI’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. SRE has a short ratio of 5.37 compared to a short interest of 2.75 for NI. This implies that the market is currently less bearish on the outlook for NI.
NiSource Inc. (NYSE:NI) beats Sempra Energy (NYSE:SRE) on a total of 8 of the 14 factors compared between the two stocks. NI is growing fastly, generates a higher return on investment and higher liquidity. In terms of valuation, NI is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, NI has better sentiment signals based on short interest.