Regions Financial Corporation (NYSE:RF) and BB&T Corporation (NYSE:BBT) are the two most active stocks in the Regional – Southeast Banks industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect RF to grow earnings at a 10.81% annual rate over the next 5 years. Comparatively, BBT is expected to grow at a 6.26% annual rate. All else equal, RF’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Regions Financial Corporation (RF) has an EBITDA margin of 40.8%, compared to an EBITDA margin of 44.75% for BB&T Corporation (BBT). This suggests that BBT underlying business is more profitable. RF’s ROI is 14.10% while BBT has a ROI of 10.20%. The interpretation is that RF’s business generates a higher return on investment than BBT’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. RF’s free cash flow (“FCF”) per share for the trailing twelve months was +0.33. Comparatively, BBT’s free cash flow per share was +1.42. On a percent-of-sales basis, RF’s free cash flow was 6.61% while BBT converted 9.94% of its revenues into cash flow. This means that, for a given level of sales, BBT 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. RF’s debt-to-equity ratio is 0.22 versus a D/E of 0.80 for BBT. BBT is therefore the more solvent of the two companies, and has lower financial risk.
RF trades at a forward P/E of 13.50, a P/B of 1.14, and a P/S of 4.76, compared to a forward P/E of 13.81, a P/B of 1.41, and a P/S of 5.40 for BBT. RF 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 is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. RF is currently priced at a -0.39% to its one-year price target of $15.33. Comparatively, BBT is -0.85% relative to its price target of $48.03. This suggests that BBT 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 2.80 for RF and 2.70 for BBT, which implies that analysts are more bullish on the outlook for RF.
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. RF has a beta of 1.34 and BBT’s beta is 1.05. BBT’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. RF has a short ratio of 1.91 compared to a short interest of 4.97 for BBT. This implies that the market is currently less bearish on the outlook for RF.
Regions Financial Corporation (NYSE:RF) beats BB&T Corporation (NYSE:BBT) on a total of 7 of the 13 factors compared between the two stocks. RF is growing fastly, generates a higher return on investment and has lower financial risk. In terms of valuation, RF is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, RF has better sentiment signals based on short interest.