First Horizon National Corporation (NYSE:FHN) and F.N.B. Corporation (NYSE:FNB) are the two most active stocks in the Regional – Southeast 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.
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 FHN to grow earnings at a 9.96% annual rate over the next 5 years. Comparatively, FNB is expected to grow at a 12.00% annual rate. All else equal, FNB’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. First Horizon National Corporation (FHN) has an EBITDA margin of 31.6%, compared to an EBITDA margin of 39.93% for F.N.B. Corporation (FNB). This suggests that FNB underlying business is more profitable. FHN’s ROI is 18.20% while FNB has a ROI of 11.50%. The interpretation is that FHN’s business generates a higher return on investment than FNB’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. FHN’s free cash flow (“FCF”) per share for the trailing twelve months was -1.67. Comparatively, FNB’s free cash flow per share was -0.20. On a percent-of-sales basis, FHN’s free cash flow was -28.55% while FNB converted -0.01% of its revenues into cash flow. This means that, for a given level of sales, FNB is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. FHN’s debt-to-equity ratio is 0.42 versus a D/E of 0.50 for FNB. FNB is therefore the more solvent of the two companies, and has lower financial risk.
FHN trades at a forward P/E of 14.78, a P/B of 1.85, and a P/S of 5.09, compared to a forward P/E of 12.85, a P/B of 1.06, and a P/S of 5.65 for FNB. FHN is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B 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. FHN is currently priced at a -3.6% to its one-year price target of $19.98. Comparatively, FNB is -15.23% relative to its price target of $16.55. This suggests that FNB 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 2.50 for FHN and 1.70 for FNB, which implies that analysts are more bullish on the outlook for FHN.
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. FHN has a beta of 1.04 and FNB’s beta is 0.95. FNB’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. FHN has a short ratio of 6.38 compared to a short interest of 5.77 for FNB. This implies that the market is currently less bearish on the outlook for FNB.
F.N.B. Corporation (NYSE:FNB) beats First Horizon National Corporation (NYSE:FHN) on a total of 10 of the 13 factors compared between the two stocks. FNB generates a higher return on investment, is more profitable, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, FNB is the cheaper of the two stocks on an earnings and book value, FNB is more undervalued relative to its price target. Finally, FNB has better sentiment signals based on short interest.