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NRG Energy, Inc. (NRG) vs. Cognizant Technology Solutions Corporation (CTSH): Which is the Better Investment?

NRG Energy, Inc. (NYSE:NRG) shares are up more than 27.95% this year and recently decreased -2.62% or -$0.98 to settle at $36.44. Cognizant Technology Solutions Corporation (NASDAQ:CTSH), on the other hand, is up 0.59% year to date as of 10/10/2018. It currently trades at $71.44 and has returned -6.69% during the past week.

NRG Energy, Inc. (NYSE:NRG) and Cognizant Technology Solutions Corporation (NASDAQ:CTSH) 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

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect NRG to grow earnings at a 74.68% annual rate over the next 5 years. Comparatively, CTSH is expected to grow at a 13.59% annual rate. All else equal, NRG’s higher growth rate would imply a greater potential for capital appreciation.

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., compared to an EBITDA margin of 20.97% for Cognizant Technology Solutions Corporation (CTSH). NRG’s ROI is 7.30% while CTSH has a ROI of 16.90%. The interpretation is that CTSH’s business generates a higher return on investment than NRG’s.

Cash Flow



Earnings don’t always accurately reflect the amount of cash that a company brings in. NRG’s free cash flow (“FCF”) per share for the trailing twelve months was -0.56. Comparatively, CTSH’s free cash flow per share was +0.74. On a percent-of-sales basis, NRG’s free cash flow was -1.6% while CTSH converted 2.9% of its revenues into cash flow. This means that, for a given level of sales, CTSH is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. NRG has a current ratio of 1.30 compared to 3.30 for CTSH. This means that CTSH can more easily cover its most immediate liabilities over the next twelve months.

Valuation

NRG trades at a forward P/E of 10.07, and a P/S of 1.04, compared to a forward P/E of 14.08, a P/B of 3.93, and a P/S of 2.70 for CTSH. NRG is the cheaper 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

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. NRG is currently priced at a -7.75% to its one-year price target of 39.50. Comparatively, CTSH is -19.92% relative to its price target of 89.21. This suggests that CTSH is the better investment over the next year.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. NRG has a beta of 1.08 and CTSH’s beta is 0.89. CTSH’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. NRG has a short ratio of 2.56 compared to a short interest of 2.22 for CTSH. This implies that the market is currently less bearish on the outlook for CTSH.

Summary

Cognizant Technology Solutions Corporation (NASDAQ:CTSH) beats NRG Energy, Inc. (NYSE:NRG) on a total of 8 of the 14 factors compared between the two stocks. CTSH is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, NRG is the cheaper of the two stocks on an earnings, book value and sales basis, CTSH is more undervalued relative to its price target. Finally, CTSH has better sentiment signals based on short interest.

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