Heritage Financial Corporation (NASDAQ:HFWA) and Pacific Continental Corporation (NASDAQ:PCBK) are the two most active stocks in the Regional – Pacific Banks industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect HFWA to grow earnings at a 10.00% annual rate over the next 5 years. Comparatively, PCBK is expected to grow at a 10.00% 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
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. Heritage Financial Corporation (HFWA) has an EBITDA margin of 45.47%, compared to an EBITDA margin of 55.72% for Pacific Continental Corporation (PCBK). This suggests that PCBK underlying business is more profitable. HFWA’s ROI is 22.70% while PCBK has a ROI of 21.50%. The interpretation is that HFWA’s business generates a higher return on investment than PCBK’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. HFWA’s free cash flow (“FCF”) per share for the trailing twelve months was +0.33. Comparatively, PCBK’s free cash flow per share was +0.31. On a percent-of-sales basis, HFWA’s free cash flow was 0.01% while PCBK converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, HFWA 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. HFWA’s debt-to-equity ratio is 0.04 versus a D/E of 0.16 for PCBK. PCBK is therefore the more solvent of the two companies, and has lower financial risk.
HFWA trades at a forward P/E of 17.44, a P/B of 1.60, and a P/S of 5.79, compared to a forward P/E of 16.51, a P/B of 1.94, and a P/S of 5.37 for PCBK. HFWA 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
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. HFWA is currently priced at a -7.71% to its one-year price target of $29.20. Comparatively, PCBK is -10.67% relative to its price target of $27.09. This suggests that PCBK 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 2.50 for HFWA and 3.00 for PCBK, which implies that analysts are more bullish on the outlook for PCBK.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. HFWA has a beta of 0.50 and PCBK’s beta is 0.77. HFWA’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. HFWA has a short ratio of 2.14 compared to a short interest of 4.29 for PCBK. This implies that the market is currently less bearish on the outlook for HFWA.
Heritage Financial Corporation (NASDAQ:HFWA) beats Pacific Continental Corporation (NASDAQ:PCBK) on a total of 7 of the 13 factors compared between the two stocks. HFWA generates a higher return on investment, has higher cash flow per share and has lower financial risk. Finally, HFWA has better sentiment signals based on short interest.