CenterState Banks, Inc. (NASDAQ:CSFL) and Park Sterling Corporation (NASDAQ:PSTB) are the two most active stocks in the Regional – Southeast Banks 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.
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 CSFL to grow earnings at a 8.00% annual rate over the next 5 years. Comparatively, PSTB is expected to grow at a 8.00% annual rate. All else equal, All else equal, the two stocks’ identical expected growth rates would imply a similar 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. CenterState Banks, Inc. (CSFL) has an EBITDA margin of 42.83%, compared to an EBITDA margin of 50.96% for Park Sterling Corporation (PSTB). This suggests that PSTB underlying business is more profitable. CSFL’s ROI is 26.40% while PSTB has a ROI of 23.80%. The interpretation is that CSFL’s business generates a higher return on investment than PSTB’s.
The value of a stock is simply the present value of its future free cash flows. CSFL’s free cash flow (“FCF”) per share for the trailing twelve months was +0.19. Comparatively, PSTB’s free cash flow per share was +0.55. On a percent-of-sales basis, CSFL’s free cash flow was 0% while PSTB converted 0.02% of its revenues into cash flow. This means that, for a given level of sales, PSTB 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. CSFL’s debt-to-equity ratio is 0.03 versus a D/E of 0.09 for PSTB. PSTB is therefore the more solvent of the two companies, and has lower financial risk.
CSFL trades at a forward P/E of 14.86, a P/B of 1.62, and a P/S of 7.07, compared to a forward P/E of 16.72, a P/B of 1.64, and a P/S of 5.01 for PSTB. 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. CSFL is currently priced at a -13.64% to its one-year price target of $28.60. Comparatively, PSTB is -10.62% relative to its price target of $12.81. This suggests that CSFL is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.20 for CSFL and 2.50 for PSTB, which implies that analysts are more bullish on the outlook for PSTB.
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. CSFL has a beta of 0.62 and PSTB’s beta is 0.83. CSFL’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. CSFL has a short ratio of 4.10 compared to a short interest of 0.96 for PSTB. This implies that the market is currently less bearish on the outlook for PSTB.
CenterState Banks, Inc. (NASDAQ:CSFL) beats Park Sterling Corporation (NASDAQ:PSTB) on a total of 7 of the 13 factors compared between the two stocks. CSFL generates a higher return on investment and has lower financial risk. In terms of valuation, CSFL is the cheaper of the two stocks on an earnings and book value, CSFL is more undervalued relative to its price target. Finally, HAFC has better sentiment signals based on short interest.