Customers Bancorp, Inc. (NYSE:CUBI) and ConnectOne Bancorp, Inc. (NASDAQ:CNOB) are the two most active stocks in the Regional – Northeast 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.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use Return on Investment (ROI) to measure this. CUBI’s ROI is 23.50% while CNOB has a ROI of 13.60%. The interpretation is that CUBI’s business generates a higher return on investment than CNOB’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. CUBI’s free cash flow (“FCF”) per share for the trailing twelve months was +0.41. Comparatively, CNOB’s free cash flow per share was +0.62. On a percent-of-sales basis, CUBI’s free cash flow was 0% while CNOB converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, CNOB is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. CUBI’s debt-to-equity ratio is 0.43 versus a D/E of 0.10 for CNOB. CUBI is therefore the more solvent of the two companies, and has lower financial risk.
CUBI trades at a forward P/E of 9.66, a P/B of 1.26, and a P/S of 2.58, compared to a forward P/E of 12.52, a P/B of 1.34, and a P/S of 4.44 for CNOB. CUBI 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
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. CUBI is currently priced at a -28.85% to its one-year price target of $40.17. Comparatively, CNOB is -61.67% relative to its price target of $60.00. This suggests that CNOB 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 2.00 for CUBI and 1.50 for CNOB, which implies that analysts are more bullish on the outlook for CUBI.
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. CUBI has a beta of 0.50 and CNOB’s beta is 0.96. CUBI’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. CUBI has a short ratio of 8.14 compared to a short interest of 5.71 for CNOB. This implies that the market is currently less bearish on the outlook for CNOB.
ConnectOne Bancorp, Inc. (NASDAQ:CNOB) beats Customers Bancorp, Inc. (NYSE:CUBI) on a total of 6 of the 11 factors compared between the two stocks. CNOB generates a higher return on investment, has a higher cash conversion rate and has lower financial risk. In terms of valuation, CUBI is the cheaper of the two stocks on an earnings, book value and sales basis, CNOB is more undervalued relative to its price target. Finally, CNOB has better sentiment signals based on short interest.