Kinder Morgan, Inc. (NYSE:KMI) shares are down more than -9.80% this year and recently decreased -0.61% or -$0.1 to settle at $16.30. NRG Energy, Inc. (NYSE:NRG), on the other hand, is up 17.80% year to date as of 05/17/2018. It currently trades at $33.55 and has returned -3.20% during the past week.
Kinder Morgan, Inc. (NYSE:KMI) and NRG Energy, Inc. (NYSE:NRG) are the two most active stocks in the Oil & Gas Pipelines 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
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect KMI to grow earnings at a 16.00% annual rate over the next 5 years. Comparatively, NRG is expected to grow at a 77.47% annual rate. All else equal, NRG’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 7.63% for NRG Energy, Inc. (NRG). KMI’s ROI is 0.30% while NRG has a ROI of 7.30%. The interpretation is that NRG’s business generates a higher return on investment than KMI’s.Cash Flow
Cash is king when it comes to investing. KMI’s free cash flow (“FCF”) per share for the trailing twelve months was +0.00. Comparatively, NRG’s free cash flow per share was -0.03. On a percent-of-sales basis, KMI’s free cash flow was 0% while NRG converted -0.09% of its revenues into cash flow. This means that, for a given level of sales, KMI 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. KMI has a current ratio of 0.50 compared to 1.20 for NRG. This means that NRG can more easily cover its most immediate liabilities over the next twelve months.Valuation
KMI trades at a forward P/E of 17.10, a P/B of 1.07, and a P/S of 2.62, compared to a forward P/E of 11.18, and a P/S of 1.00 for NRG. KMI 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
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. KMI is currently priced at a -21.14% to its one-year price target of 20.67. Comparatively, NRG is -8.08% relative to its price target of 36.50. This suggests that KMI is the better investment over the next year.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. KMI has a beta of 0.62 and NRG’s beta is 0.97. KMI’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. KMI has a short ratio of 3.37 compared to a short interest of 2.40 for NRG. This implies that the market is currently less bearish on the outlook for NRG.Summary
NRG Energy, Inc. (NYSE:NRG) beats Kinder Morgan, Inc. (NYSE:KMI) on a total of 9 of the 14 factors compared between the two stocks. NRG is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, NRG is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, NRG has better sentiment signals based on short interest.