LegacyTexas Financial Group, Inc. (NASDAQ:LTXB) and Veritex Holdings, Inc. (NASDAQ:VBTX) are the two most active stocks in the Regional – Southwest 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.
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 LTXB to grow earnings at a 12.00% annual rate over the next 5 years. Comparatively, VBTX is expected to grow at a 10.00% annual rate. All else equal, LTXB’s higher growth rate would imply a greater potential for capital appreciation.
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 EBITDA margin and Return on Investment (ROI) to measure this. LegacyTexas Financial Group, Inc. (LTXB) has an EBITDA margin of 64.78%, compared to an EBITDA margin of 58% for Veritex Holdings, Inc. (VBTX). This suggests that LTXB underlying business is more profitable. LTXB’s ROI is 19.80% while VBTX has a ROI of 13.10%. The interpretation is that LTXB’s business generates a higher return on investment than VBTX’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. LTXB’s free cash flow (“FCF”) per share for the trailing twelve months was +0.71. Comparatively, VBTX’s free cash flow per share was -0.30. On a percent-of-sales basis, LTXB’s free cash flow was 0.01% while VBTX converted -0.01% of its revenues into cash flow. This means that, for a given level of sales, LTXB 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. LTXB’s debt-to-equity ratio is 0.15 versus a D/E of 0.03 for VBTX. LTXB is therefore the more solvent of the two companies, and has lower financial risk.
LTXB trades at a forward P/E of 13.80, a P/B of 1.87, and a P/S of 5.25, compared to a forward P/E of 15.83, a P/B of 1.62, and a P/S of 11.56 for VBTX. 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. LTXB is currently priced at a -14.3% to its one-year price target of $43.28. Comparatively, VBTX is -14.67% relative to its price target of $30.88. This suggests that VBTX 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 2.20 for LTXB and 1.80 for VBTX, which implies that analysts are more bullish on the outlook for LTXB.
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. LTXB has a beta of 1.14.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. LTXB has a short ratio of 7.85 compared to a short interest of 8.63 for VBTX. This implies that the market is currently less bearish on the outlook for LTXB.
LegacyTexas Financial Group, Inc. (NASDAQ:LTXB) beats Veritex Holdings, Inc. (NASDAQ:VBTX) on a total of 8 of the 12 factors compared between the two stocks. LTXB is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, LTXB is the cheaper of the two stocks on an earnings and sales basis, Finally, LTXB has better sentiment signals based on short interest.