First Commonwealth Financial Corporation (NYSE:FCF) and TrustCo Bank Corp NY (NASDAQ:TRST) are the two most active stocks in the Regional – Northeast Banks industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
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 FCF to grow earnings at a 5.50% annual rate over the next 5 years. Comparatively, TRST is expected to grow at a 5.00% annual rate. All else equal, FCF’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. First Commonwealth Financial Corporation (FCF) has an EBITDA margin of 45.13%, compared to an EBITDA margin of 41.9% for TrustCo Bank Corp NY (TRST). This suggests that FCF underlying business is more profitable. FCF’s ROI is 18.60% while TRST has a ROI of 27.10%. The interpretation is that TRST’s business generates a higher return on investment than FCF’s.
Cash is king when it comes to investing. FCF’s free cash flow (“FCF”) per share for the trailing twelve months was +0.06. Comparatively, TRST’s free cash flow per share was +0.14. On a percent-of-sales basis, FCF’s free cash flow was 0% while TRST converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, TRST 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. FCF’s debt-to-equity ratio is 1.06 versus a D/E of 0.00 for TRST. FCF is therefore the more solvent of the two companies, and has lower financial risk.
FCF trades at a forward P/E of 14.68, a P/B of 1.41, and a P/S of 5.43, compared to a forward P/E of 13.22, a P/B of 1.67, and a P/S of 4.59 for TRST. FCF 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. FCF is currently priced at a -7.88% to its one-year price target of $13.83. Comparatively, TRST is -8.24% relative to its price target of $8.50. This suggests that TRST 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 2.80 for FCF and 3.00 for TRST, which implies that analysts are more bullish on the outlook for TRST.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. FCF has a beta of 0.99 and TRST’s beta is 1.21. FCF’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. FCF has a short ratio of 0.00 compared to a short interest of 2.30 for TRST. This implies that the market is currently less bearish on the outlook for FCF.
TrustCo Bank Corp NY (NASDAQ:TRST) beats First Commonwealth Financial Corporation (NYSE:FCF) on a total of 7 of the 13 factors compared between the two stocks. TRST is growing fastly, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, TRST is the cheaper of the two stocks on an earnings and sales basis, TRST is more undervalued relative to its price target. Finally, OSBC has better sentiment signals based on short interest.