Fidelity Southern Corporation (NASDAQ:LION) and Guaranty Bancorp (NASDAQ:GBNK) are the two most active stocks in the Regional – Mid-Atlantic 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.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect LION to grow earnings at a 5.00% annual rate over the next 5 years. Comparatively, GBNK is expected to grow at a 10.00% annual rate. All else equal, GBNK’s higher growth rate would imply a greater 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. Fidelity Southern Corporation (LION) has an EBITDA margin of 36.19%, compared to an EBITDA margin of 50.33% for Guaranty Bancorp (GBNK). This suggests that GBNK underlying business is more profitable. LION’s ROI is 20.40% while GBNK has a ROI of 18.70%. The interpretation is that LION’s business generates a higher return on investment than GBNK’s.
If there’s one thing investors care more about than earnings, it’s cash flow. LION’s free cash flow (“FCF”) per share for the trailing twelve months was -0.41. Comparatively, GBNK’s free cash flow per share was +0.43. On a percent-of-sales basis, LION’s free cash flow was -0% while GBNK converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, GBNK is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. LION’s debt-to-equity ratio is 0.32 versus a D/E of 0.18 for GBNK. LION is therefore the more solvent of the two companies, and has lower financial risk.
LION trades at a forward P/E of 13.13, a P/B of 1.52, and a P/S of 3.82, compared to a forward P/E of 16.01, a P/B of 1.98, and a P/S of 6.17 for GBNK. LION 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. LION is currently priced at a -9.75% to its one-year price target of $24.20. Comparatively, GBNK is -10.42% relative to its price target of $29.08. This suggests that GBNK 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 2.40 for LION and 2.30 for GBNK, which implies that analysts are more bullish on the outlook for LION.
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. LION has a beta of 1.31 and GBNK’s beta is 0.98. GBNK’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. LION has a short ratio of 12.29 compared to a short interest of 4.11 for GBNK. This implies that the market is currently less bearish on the outlook for GBNK.
Guaranty Bancorp (NASDAQ:GBNK) beats Fidelity Southern Corporation (NASDAQ:LION) on a total of 9 of the 13 factors compared between the two stocks. GBNK generates a higher return on investment, is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, LION is the cheaper of the two stocks on an earnings, book value and sales basis, GBNK is more undervalued relative to its price target. Finally, GBNK has better sentiment signals based on short interest.