Old Second Bancorp, Inc. (NASDAQ:OSBC) and National Bank Holdings Corporation (NYSE:NBHC) are the two most active stocks in the Regional – Midwest 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 OSBC to grow earnings at a 2.00% annual rate over the next 5 years. Comparatively, NBHC is expected to grow at a 10.00% annual rate. All else equal, NBHC’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. Old Second Bancorp, Inc. (OSBC) has an EBITDA margin of 42.55%, compared to an EBITDA margin of 38.98% for National Bank Holdings Corporation (NBHC). This suggests that OSBC underlying business is more profitable. OSBC’s ROI is 19.50% while NBHC has a ROI of 22.20%. The interpretation is that NBHC’s business generates a higher return on investment than OSBC’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. OSBC’s free cash flow (“FCF”) per share for the trailing twelve months was +0.92. Comparatively, NBHC’s free cash flow per share was +0.51. On a percent-of-sales basis, OSBC’s free cash flow was 0.03% while NBHC converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, OSBC 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. OSBC’s debt-to-equity ratio is 0.53 versus a D/E of 0.00 for NBHC. OSBC is therefore the more solvent of the two companies, and has lower financial risk.
OSBC trades at a forward P/E of 13.40, a P/B of 1.76, and a P/S of 4.18, compared to a forward P/E of 18.57, a P/B of 1.61, and a P/S of 5.56 for NBHC. 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. OSBC is currently priced at a -7.95% to its one-year price target of $12.33. Comparatively, NBHC is -6.69% relative to its price target of $34.83. This suggests that OSBC 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 3.00 for OSBC and 2.80 for NBHC, which implies that analysts are more bullish on the outlook for OSBC.
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. OSBC has a beta of 1.35 and NBHC’s beta is 0.67. NBHC’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. OSBC has a short ratio of 4.22 compared to a short interest of 6.09 for NBHC. This implies that the market is currently less bearish on the outlook for OSBC.
Old Second Bancorp, Inc. (NASDAQ:OSBC) beats National Bank Holdings Corporation (NYSE:NBHC) on a total of 7 of the 13 factors compared between the two stocks. OSBC is more profitable, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, OSBC is the cheaper of the two stocks on an earnings and sales basis, OSBC is more undervalued relative to its price target. Finally, OSBC has better sentiment signals based on short interest.