Exelon Corporation (NYSE:EXC) shares are up more than 10.53% this year and recently decreased -1.04% or -$0.46 to settle at $43.56. United Continental Holdings, Inc. (NASDAQ:UAL), on the other hand, is up 17.11% year to date as of 10/10/2018. It currently trades at $78.93 and has returned -9.68% during the past week.
Exelon Corporation (NYSE:EXC) and United Continental Holdings, Inc. (NASDAQ:UAL) are the two most active stocks in the Diversified Utilities industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.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 EXC to grow earnings at a 4.30% annual rate over the next 5 years. Comparatively, UAL is expected to grow at a 18.71% annual rate. All else equal, UAL’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 12.38% for United Continental Holdings, Inc. (UAL). EXC’s ROI is 6.30% while UAL has a ROI of 10.50%. The interpretation is that UAL’s business generates a higher return on investment than EXC’s.Cash Flow
Cash is king when it comes to investing. EXC’s free cash flow (“FCF”) per share for the trailing twelve months was +0.11. Comparatively, UAL’s free cash flow per share was +6.12. On a percent-of-sales basis, EXC’s free cash flow was 0.32% while UAL converted 4.42% of its revenues into cash flow. This means that, for a given level of sales, UAL 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. EXC has a current ratio of 1.20 compared to 0.60 for UAL. This means that EXC can more easily cover its most immediate liabilities over the next twelve months. EXC’s debt-to-equity ratio is 1.18 versus a D/E of 1.68 for UAL. UAL is therefore the more solvent of the two companies, and has lower financial risk.Valuation
EXC trades at a forward P/E of 14.07, a P/B of 1.38, and a P/S of 1.21, compared to a forward P/E of 8.13, a P/B of 2.51, and a P/S of 0.56 for UAL. EXC is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. EXC is currently priced at a -4.95% to its one-year price target of 45.83. Comparatively, UAL is -17.32% relative to its price target of 95.46. This suggests that UAL 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. EXC has a beta of 0.26 and UAL’s beta is 0.69. EXC’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. EXC has a short ratio of 3.35 compared to a short interest of 4.33 for UAL. This implies that the market is currently less bearish on the outlook for EXC.Summary
United Continental Holdings, Inc. (NASDAQ:UAL) beats Exelon Corporation (NYSE:EXC) on a total of 7 of the 14 factors compared between the two stocks. UAL 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, UAL is the cheaper of the two stocks on an earnings and sales basis, UAL is more undervalued relative to its price target. Finally, BP has better sentiment signals based on short interest.