Wells Fargo & Company (NYSE:WFC) shares are down more than -10.63% this year and recently decreased -1.49% or -$0.82 to settle at $54.22. American Electric Power Company, Inc. (NYSE:AEP), on the other hand, is down -11.35% year to date as of 05/17/2018. It currently trades at $65.22 and has returned -2.69% during the past week.
Wells Fargo & Company (NYSE:WFC) and American Electric Power Company, Inc. (NYSE:AEP) are the two most active stocks in the Money Center Banks industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.Growth
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 WFC to grow earnings at a 9.37% annual rate over the next 5 years. Comparatively, AEP is expected to grow at a 5.79% annual rate. All else equal, WFC’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 23.33% for American Electric Power Company, Inc. (AEP). WFC’s ROI is 9.80% while AEP has a ROI of 6.30%. The interpretation is that WFC’s business generates a higher return on investment than AEP’s.Cash Flow
The amount of free cash flow available to investors is ultimately what determines the value of a stock. WFC’s free cash flow (“FCF”) per share for the trailing twelve months was +2.63. Comparatively, AEP’s free cash flow per share was -2.91. On a percent-of-sales basis, WFC’s free cash flow was 13.12% while AEP converted -9.29% of its revenues into cash flow. This means that, for a given level of sales, WFC is able to generate more free cash flow for investors.Liquidity and Financial Risk
WFC’s debt-to-equity ratio is 1.27 versus a D/E of 1.30 for AEP. AEP is therefore the more solvent of the two companies, and has lower financial risk.
WFC trades at a forward P/E of 10.56, a P/B of 1.48, and a P/S of 4.41, compared to a forward P/E of 15.82, a P/B of 1.74, and a P/S of 2.04 for AEP. 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. WFC is currently priced at a -10.48% to its one-year price target of 60.57. Comparatively, AEP is -11.46% relative to its price target of 73.66. This suggests that AEP is the better investment over the next year.
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. WFC has a beta of 1.12 and AEP’s beta is 0.17. AEP’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. WFC has a short ratio of 1.55 compared to a short interest of 2.99 for AEP. This implies that the market is currently less bearish on the outlook for WFC.Summary
Wells Fargo & Company (NYSE:WFC) beats American Electric Power Company, Inc. (NYSE:AEP) on a total of 9 of the 14 factors compared between the two stocks. WFC is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, WFC is the cheaper of the two stocks on an earnings and book value, Finally, WFC has better sentiment signals based on short interest.