Finance

Critical Comparison: Public Service Enterprise Group Incorporated (PEG) vs. Vistra Energy Corp. (VST)

Public Service Enterprise Group Incorporated (NYSE:PEG) shares are up more than 5.88% this year and recently increased 0.85% or $0.46 to settle at $54.53. Vistra Energy Corp. (NYSE:VST), on the other hand, is up 35.92% year to date as of 10/10/2018. It currently trades at $24.90 and has returned -2.05% during the past week.

Public Service Enterprise Group Incorporated (NYSE:PEG) and Vistra Energy Corp. (NYSE:VST) are the two most active stocks in the Diversified Utilities 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 PEG to grow earnings at a 6.34% annual rate over the next 5 years. Comparatively, VST is expected to grow at a 12.60% annual rate. All else equal, VST’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Public Service Enterprise Group Incorporated (PEG) has an EBITDA margin of 39.97%. This suggests that PEG underlying business is more profitable PEG’s ROI is 3.60% while VST has a ROI of 1.30%. The interpretation is that PEG’s business generates a higher return on investment than VST’s.

Cash Flow



Cash is king when it comes to investing. PEG’s free cash flow (“FCF”) per share for the trailing twelve months was -1.36. Comparatively, VST’s free cash flow per share was -0.26. On a percent-of-sales basis, PEG’s free cash flow was -7.56% while VST converted -2.48% of its revenues into cash flow. This means that, for a given level of sales, VST 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. PEG has a current ratio of 0.70 compared to 1.30 for VST. This means that VST can more easily cover its most immediate liabilities over the next twelve months. PEG’s debt-to-equity ratio is 1.01 versus a D/E of 1.42 for VST. VST is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

PEG trades at a forward P/E of 16.48, a P/B of 1.94, and a P/S of 2.97, compared to a forward P/E of 11.35, a P/B of 1.56, and a P/S of 2.14 for VST. PEG 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

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. PEG is currently priced at a -2.63% to its one-year price target of 56.00. Comparatively, VST is -13.72% relative to its price target of 28.86. This suggests that VST is the better investment over the next year.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. PEG has a short ratio of 3.00 compared to a short interest of 4.35 for VST. This implies that the market is currently less bearish on the outlook for PEG.

Summary




Vistra Energy Corp. (NYSE:VST) beats Public Service Enterprise Group Incorporated (NYSE:PEG) on a total of 10 of the 14 factors compared between the two stocks. VST is more profitable, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, VST is the cheaper of the two stocks on an earnings, book value and sales basis, VST is more undervalued relative to its price target. Finally, CFG has better sentiment signals based on short interest.

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