Financial Institutions, Inc. (NASDAQ:FISI) and Southside Bancshares, Inc. (NASDAQ:SBSI) are the two most active stocks in the Regional – Mid-Atlantic Banks industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect FISI to grow earnings at a 8.00% annual rate over the next 5 years. Comparatively, SBSI is expected to grow at a 2.00% annual rate. All else equal, FISI’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. Financial Institutions, Inc. (FISI) has an EBITDA margin of 47.97%, compared to an EBITDA margin of 65.02% for Southside Bancshares, Inc. (SBSI). This suggests that SBSI underlying business is more profitable. FISI’s ROI is 23.60% while SBSI has a ROI of 17.70%. The interpretation is that FISI’s business generates a higher return on investment than SBSI’s.
The value of a stock is simply the present value of its future free cash flows. FISI’s free cash flow (“FCF”) per share for the trailing twelve months was +0.71. Comparatively, SBSI’s free cash flow per share was +0.11. On a percent-of-sales basis, FISI’s free cash flow was 0.01% while SBSI converted 0% of its revenues into cash flow. This means that, for a given level of sales, FISI is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. FISI’s debt-to-equity ratio is 0.12 versus a D/E of 0.29 for SBSI. SBSI is therefore the more solvent of the two companies, and has lower financial risk.
FISI trades at a forward P/E of 12.19, a P/B of 1.20, and a P/S of 3.45, compared to a forward P/E of 14.31, a P/B of 1.78, and a P/S of 5.57 for SBSI. FISI 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”. FISI is currently priced at a -19.88% to its one-year price target of $33.70. Comparatively, SBSI is -9.84% relative to its price target of $36.77. This suggests that FISI 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 FISI and 3.00 for SBSI, which implies that analysts are more bullish on the outlook for SBSI.
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. FISI has a beta of 1.23 and SBSI’s beta is 0.77. SBSI’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. FISI has a short ratio of 0.72 compared to a short interest of 15.17 for SBSI. This implies that the market is currently less bearish on the outlook for FISI.
Financial Institutions, Inc. (NASDAQ:FISI) beats Southside Bancshares, Inc. (NASDAQ:SBSI) on a total of 11 of the 13 factors compared between the two stocks. FISI is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, FISI is the cheaper of the two stocks on an earnings, book value and sales basis, FISI is more undervalued relative to its price target. Finally, FISI has better sentiment signals based on short interest.