Earnings

Critical Comparison: Hanmi Financial Corporation (HAFC) vs. Westamerica Bancorporation (WABC)

Hanmi Financial Corporation (NASDAQ:HAFC) and Westamerica Bancorporation (NASDAQ:WABC) 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.

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 HAFC to grow earnings at a 8.00% annual rate over the next 5 years. Comparatively, WABC is expected to grow at a 3.00% annual rate. All else equal, HAFC’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. Hanmi Financial Corporation (HAFC) has an EBITDA margin of 64.18%, compared to an EBITDA margin of 59.45% for Westamerica Bancorporation (WABC). This suggests that HAFC underlying business is more profitable. HAFC’s ROI is 23.90% while WABC has a ROI of 20.30%. The interpretation is that HAFC’s business generates a higher return on investment than WABC’s.

Cash Flow 

Cash is king when it comes to investing. HAFC’s free cash flow (“FCF”) per share for the trailing twelve months was +0.13. Comparatively, WABC’s free cash flow per share was +0.16. On a percent-of-sales basis, HAFC’s free cash flow was 0% while WABC converted 0% of its revenues into cash flow. This means that, for a given level of sales, HAFC 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. HAFC’s debt-to-equity ratio is 0.21 versus a D/E of 0.00 for WABC. HAFC is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

HAFC trades at a forward P/E of 13.62, a P/B of 1.61, and a P/S of 4.73, compared to a forward P/E of 20.92, a P/B of 2.31, and a P/S of 10.37 for WABC. HAFC 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

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. HAFC is currently priced at a -10.97% to its one-year price target of $31.00. Comparatively, WABC is 3.78% relative to its price target of $50.33. This suggests that HAFC 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 HAFC and 3.50 for WABC, which implies that analysts are more bullish on the outlook for WABC.

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. HAFC has a beta of 0.79 and WABC’s beta is 1.05. HAFC’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. HAFC has a short ratio of 9.29 compared to a short interest of 27.70 for WABC. This implies that the market is currently less bearish on the outlook for HAFC.

Summary

Hanmi Financial Corporation (NASDAQ:HAFC) beats Westamerica Bancorporation (NASDAQ:WABC) on a total of 10 of the 13 factors compared between the two stocks. HAFC is growing fastly, is more profitable and generates a higher return on investment. In terms of valuation, HAFC is the cheaper of the two stocks on an earnings, book value and sales basis, HAFC is more undervalued relative to its price target. Finally, HAFC has better sentiment signals based on short interest.

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