Enterprise Financial Services Corp (NASDAQ:EFSC) and Independent Bank Group, Inc. (NASDAQ:IBTX) are the two most active stocks in the Regional – Southwest 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.
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 EFSC to grow earnings at a 9.00% annual rate over the next 5 years. Comparatively, IBTX is expected to grow at a 10.00% annual rate. All else equal, IBTX’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. Enterprise Financial Services Corp (EFSC) has an EBITDA margin of 56.49%, compared to an EBITDA margin of 61.25% for Independent Bank Group, Inc. (IBTX). This suggests that IBTX underlying business is more profitable. EFSC’s ROI is 21.50% while IBTX has a ROI of 18.50%. The interpretation is that EFSC’s business generates a higher return on investment than IBTX’s.
If there’s one thing investors care more about than earnings, it’s cash flow. EFSC’s free cash flow (“FCF”) per share for the trailing twelve months was +0.78. Comparatively, IBTX’s free cash flow per share was +0.26. On a percent-of-sales basis, EFSC’s free cash flow was 0.01% while IBTX converted 0% of its revenues into cash flow. This means that, for a given level of sales, EFSC 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. EFSC’s debt-to-equity ratio is 0.22 versus a D/E of 0.00 for IBTX. EFSC is therefore the more solvent of the two companies, and has lower financial risk.
EFSC trades at a forward P/E of 12.52, a P/B of 1.64, and a P/S of 5.29, compared to a forward P/E of 13.53, a P/B of 1.26, and a P/S of 6.67 for IBTX. 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. EFSC is currently priced at a -17.56% to its one-year price target of $46.40. Comparatively, IBTX is -17.79% relative to its price target of $70.25. This suggests that IBTX 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 2.60 for EFSC and 2.00 for IBTX, which implies that analysts are more bullish on the outlook for EFSC.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. EFSC has a beta of 0.88 and IBTX’s beta is 1.27. EFSC’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. EFSC has a short ratio of 1.59 compared to a short interest of 5.21 for IBTX. This implies that the market is currently less bearish on the outlook for EFSC.
Enterprise Financial Services Corp (NASDAQ:EFSC) beats Independent Bank Group, Inc. (NASDAQ:IBTX) on a total of 7 of the 13 factors compared between the two stocks. EFSC generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, EFSC is the cheaper of the two stocks on an earnings and sales basis, Finally, EFSC has better sentiment signals based on short interest.