Finance

Suncor Energy Inc. (SU) vs. PG&E Corporation (PCG): Which is the Better Investment?

Suncor Energy Inc. (NYSE:SU) shares are up more than 1.74% this year and recently decreased -4.13% or -$1.61 to settle at $37.36. PG&E Corporation (NYSE:PCG), on the other hand, is up 6.29% year to date as of 10/10/2018. It currently trades at $47.65 and has returned 0.95% during the past week.

Suncor Energy Inc. (NYSE:SU) and PG&E Corporation (NYSE:PCG) are the two most active stocks in the Independent Oil & Gas industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

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 SU to grow earnings at a 12.64% annual rate over the next 5 years. Comparatively, PCG is expected to grow at a 3.30% annual rate. All else equal, SU’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. EBITDA margin of 4.45% for PG&E Corporation (PCG). SU’s ROI is 5.10% while PCG has a ROI of 6.80%. The interpretation is that PCG’s business generates a higher return on investment than SU’s.

Cash Flow



Cash is king when it comes to investing. SU’s free cash flow (“FCF”) per share for the trailing twelve months was +0.06. Comparatively, PCG’s free cash flow per share was -0.36. On a percent-of-sales basis, SU’s free cash flow was 0.39% while PCG converted -1.09% of its revenues into cash flow. This means that, for a given level of sales, SU is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. SU has a current ratio of 0.90 compared to 0.70 for PCG. This means that SU can more easily cover its most immediate liabilities over the next twelve months. SU’s debt-to-equity ratio is 0.40 versus a D/E of 1.02 for PCG. PCG is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

SU trades at a forward P/E of 11.88, a P/B of 1.73, and a P/S of 2.21, compared to a forward P/E of 11.85, a P/B of 1.31, and a P/S of 1.43 for PCG. SU 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 isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. SU is currently priced at a -12.77% to its one-year price target of 42.83. Comparatively, PCG is -9% relative to its price target of 52.36. This suggests that SU is the better investment over the next year.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. SU has a beta of 0.87 and PCG’s beta is -0.07. PCG’s shares are therefore the less volatile of the two stocks.

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. SU has a short ratio of 1.44 compared to a short interest of 1.69 for PCG. This implies that the market is currently less bearish on the outlook for SU.

Summary

Suncor Energy Inc. (NYSE:SU) beats PG&E Corporation (NYSE:PCG) on a total of 8 of the 14 factors compared between the two stocks. SU is growing fastly, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. SU is more undervalued relative to its price target. Finally, SU has better sentiment signals based on short interest.

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