U.S. Bancorp (NYSE:USB) and Huntington Bancshares Incorporated (NASDAQ:HBAN) are the two most active stocks in the Regional – Midwest 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.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect USB to grow earnings at a 6.05% annual rate over the next 5 years. Comparatively, HBAN is expected to grow at a 9.80% annual rate. All else equal, HBAN’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. U.S. Bancorp (USB) has an EBITDA margin of 52.07%, compared to an EBITDA margin of 48.69% for Huntington Bancshares Incorporated (HBAN). This suggests that USB underlying business is more profitable. USB’s ROI is 10.70% while HBAN has a ROI of 11.20%. The interpretation is that HBAN’s business generates a higher return on investment than USB’s.
Cash is king when it comes to investing. USB’s free cash flow (“FCF”) per share for the trailing twelve months was +1.09. Comparatively, HBAN’s free cash flow per share was +0.22. On a percent-of-sales basis, USB’s free cash flow was 8.01% while HBAN converted 6.34% of its revenues into cash flow. This means that, for a given level of sales, USB 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. USB’s debt-to-equity ratio is 0.88 versus a D/E of 0.89 for HBAN. HBAN is therefore the more solvent of the two companies, and has lower financial risk.
USB trades at a forward P/E of 14.20, a P/B of 2.11, and a P/S of 6.59, compared to a forward P/E of 12.77, a P/B of 1.59, and a P/S of 4.76 for HBAN. USB is the expensive 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. USB is currently priced at a -1.86% to its one-year price target of $54.78. Comparatively, HBAN is -6.5% relative to its price target of $14.93. This suggests that HBAN 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 2.70 for USB and 2.10 for HBAN, which implies that analysts are more bullish on the outlook for USB.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. USB has a beta of 0.88 and HBAN’s beta is 1.38. USB’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. USB has a short ratio of 2.97 compared to a short interest of 2.81 for HBAN. This implies that the market is currently less bearish on the outlook for HBAN.
Huntington Bancshares Incorporated (NASDAQ:HBAN) beats U.S. Bancorp (NYSE:USB) on a total of 8 of the 13 factors compared between the two stocks. HBAN is more profitable and generates a higher return on investment. In terms of valuation, HBAN is the cheaper of the two stocks on an earnings, book value and sales basis, HBAN is more undervalued relative to its price target. Finally, HBAN has better sentiment signals based on short interest.