FirstEnergy Corp. (NYSE:FE) shares are up more than 4.46% this year and recently increased 0.28% or $0.09 to settle at $32.44. Entergy Corporation (NYSE:ETR), on the other hand, is up 13.15% year to date as of 12/05/2017. It currently trades at $83.52 and has returned -3.72% during the past week.
FirstEnergy Corp. (NYSE:FE) and Entergy Corporation (NYSE:ETR) are the two most active stocks in the Electric 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.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect FE to grow earnings at a -7.29% annual rate over the next 5 years. Comparatively, ETR is expected to grow at a -5.38% annual rate. All else equal, ETR’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 3.03% for Entergy Corporation (ETR). FE’s ROI is -18.10% while ETR has a ROI of -0.30%. The interpretation is that ETR’s business generates a higher return on investment than FE’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. FE’s free cash flow (“FCF”) per share for the trailing twelve months was +1.13. Comparatively, ETR’s free cash flow per share was -1.03. On a percent-of-sales basis, FE’s free cash flow was 3.45% while ETR converted -1.71% of its revenues into cash flow. This means that, for a given level of sales, FE is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. FE has a current ratio of 0.70 compared to 0.80 for ETR. This means that ETR can more easily cover its most immediate liabilities over the next twelve months. FE’s debt-to-equity ratio is 3.54 versus a D/E of 1.87 for ETR. FE is therefore the more solvent of the two companies, and has lower financial risk.
FE trades at a forward P/E of 12.79, a P/B of 2.24, and a P/S of 1.02, compared to a forward P/E of 16.34, a P/B of 1.72, and a P/S of 1.34 for ETR. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
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. FE has a beta of 0.24 and ETR’s beta is 0.54. FE’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. FE has a short ratio of 2.80 compared to a short interest of 2.73 for ETR. This implies that the market is currently less bearish on the outlook for ETR.
Entergy Corporation (NYSE:ETR) beats FirstEnergy Corp. (NYSE:FE) on a total of 7 of the 13 factors compared between the two stocks. ETR has higher cash flow per share, is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. Finally, ETR has better sentiment signals based on short interest.