Banc of California, Inc. (NYSE:BANC) and First Interstate BancSystem, Inc. (NASDAQ:FIBK) are the two most active stocks in the Regional – Pacific Banks 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.
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 BANC to grow earnings at a 12.33% annual rate over the next 5 years. Comparatively, FIBK is expected to grow at a 9.00% annual rate. All else equal, BANC’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. Banc of California, Inc. (BANC) has an EBITDA margin of 33.34%, compared to an EBITDA margin of 43.16% for First Interstate BancSystem, Inc. (FIBK). This suggests that FIBK underlying business is more profitable. BANC’s ROI is 32.30% while FIBK has a ROI of 20.10%. The interpretation is that BANC’s business generates a higher return on investment than FIBK’s.
The value of a stock is simply the present value of its future free cash flows. BANC’s free cash flow (“FCF”) per share for the trailing twelve months was -0.90. Comparatively, FIBK’s free cash flow per share was -0.13. On a percent-of-sales basis, BANC’s free cash flow was -0.01% while FIBK converted -0% of its revenues into cash flow. This means that, for a given level of sales, FIBK 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. BANC’s debt-to-equity ratio is 0.23 versus a D/E of 0.09 for FIBK. BANC is therefore the more solvent of the two companies, and has lower financial risk.
BANC trades at a forward P/E of 16.10, a P/B of 1.33, and a P/S of 2.48, compared to a forward P/E of 13.66, a P/B of 1.22, and a P/S of 5.25 for FIBK. BANC is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B 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. BANC is currently priced at a -13.09% to its one-year price target of $22.38. Comparatively, FIBK is -14.17% relative to its price target of $42.00. This suggests that FIBK 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 2.00 for BANC and 2.30 for FIBK, which implies that analysts are more bullish on the outlook for FIBK.
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. BANC has a beta of 0.99 and FIBK’s beta is 1.16. BANC’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. BANC has a short ratio of 20.92 compared to a short interest of 6.91 for FIBK. This implies that the market is currently less bearish on the outlook for FIBK.
First Interstate BancSystem, Inc. (NASDAQ:FIBK) beats Banc of California, Inc. (NYSE:BANC) on a total of 8 of the 13 factors compared between the two stocks. FIBK is growing fastly, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, FIBK is the cheaper of the two stocks on an earnings and book value, FIBK is more undervalued relative to its price target. Finally, FIBK has better sentiment signals based on short interest.