Finance

Critical Comparison: PG&E Corporation (PCG) vs. Vistra Energy Corp. (VST)

PG&E Corporation (NYSE:PCG) shares are down more than -5.82% this year and recently decreased -0.85% or -$0.36 to settle at $42.22. Vistra Energy Corp. (NYSE:VST), on the other hand, is up 24.89% year to date as of 05/17/2018. It currently trades at $22.88 and has returned -0.13% during the past week.

PG&E Corporation (NYSE:PCG) and Vistra Energy Corp. (NYSE:VST) are the two most active stocks in the Electric Utilities industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect PCG to grow earnings at a 3.63% annual rate over the next 5 years.

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. PG&E Corporation (PCG) has an EBITDA margin of 16.95%. This suggests that PCG underlying business is more profitable PCG’s ROI is 6.80% while VST has a ROI of 1.30%. The interpretation is that PCG’s business generates a higher return on investment than VST’s.

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. PCG’s free cash flow (“FCF”) per share for the trailing twelve months was +0.08. Comparatively, VST’s free cash flow per share was -0.17. On a percent-of-sales basis, PCG’s free cash flow was 0.24% while VST converted -1.64% 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

Balance sheet risk is one of the biggest factors to consider before investing. PCG has a current ratio of 0.80 compared to 1.70 for VST. This means that VST can more easily cover its most immediate liabilities over the next twelve months. PCG’s debt-to-equity ratio is 0.95 versus a D/E of 0.73 for VST. PCG is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

PCG trades at a forward P/E of 10.51, a P/B of 1.10, and a P/S of 1.27, compared to a forward P/E of 10.44, a P/B of 1.62, and a P/S of 2.48 for VST. 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 -14.2% to its one-year price target of 49.21. Comparatively, VST is -11.69% relative to its price target of 25.91. This suggests that PCG is the better investment over the next year.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. PCG has a short ratio of 1.88 compared to a short interest of 2.96 for VST. This implies that the market is currently less bearish on the outlook for PCG.

Summary




PG&E Corporation (NYSE:PCG) beats Vistra Energy Corp. (NYSE:VST) on a total of 10 of the 14 factors compared between the two stocks. PCG is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, PCG is the cheaper of the two stocks on book value and sales basis, PCG is more undervalued relative to its price target. Finally, PCG has better sentiment signals based on short interest.

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