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Critical Comparison: First Merchants Corporation (FRME) vs. First Financial Bancorp. (FFBC)

First Merchants Corporation (NASDAQ:FRME) and First Financial Bancorp. (NASDAQ:FFBC) are the two most active stocks in the Regional – Midwest 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.

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 FRME to grow earnings at a 7.00% annual rate over the next 5 years. Comparatively, FFBC is expected to grow at a 10.00% annual rate. All else equal, FFBC’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns



Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. First Merchants Corporation (FRME) has an EBITDA margin of 79.31%, compared to an EBITDA margin of 55.33% for First Financial Bancorp. (FFBC). This suggests that FRME underlying business is more profitable. FRME’s ROI is 18.80% while FFBC has a ROI of 22.40%. The interpretation is that FFBC’s business generates a higher return on investment than FRME’s.

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. FRME’s debt-to-equity ratio is 0.12 versus a D/E of 0.13 for FFBC. FFBC is therefore the more solvent of the two companies, and has lower financial risk.




Valuation

FRME trades at a forward P/E of 14.43, a P/B of 1.59, and a P/S of 6.03, compared to a forward P/E of 13.79, a P/B of 1.70, and a P/S of 4.97 for FFBC. FRME 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. FRME is currently priced at a -13.18% to its one-year price target of $45.08. Comparatively, FFBC is -13.16% relative to its price target of $28.50. This suggests that FRME 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 FRME and 2.60 for FFBC, which implies that analysts are more bullish on the outlook for FFBC.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. FRME has a beta of 0.95 and FFBC’s beta is 1.17. FRME’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. FRME has a short ratio of 5.72 compared to a short interest of 4.62 for FFBC. This implies that the market is currently less bearish on the outlook for FFBC.

Summary

First Financial Bancorp. (NASDAQ:FFBC) beats First Merchants Corporation (NASDAQ:FRME) on a total of 6 of the 13 factors compared between the two stocks. FFBC is more profitable, generates a higher return on investment and has higher cash flow per share. In terms of valuation, FFBC is the cheaper of the two stocks on an earnings and sales basis, Finally, FFBC has better sentiment signals based on short interest.

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