Zions Bancorporation (NASDAQ:ZION) and Umpqua Holdings Corporation (NASDAQ:UMPQ) are the two most active stocks in the Regional – Pacific 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 ZION to grow earnings at a 14.83% annual rate over the next 5 years. Comparatively, UMPQ is expected to grow at a 8.50% annual rate. All else equal, ZION’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. Zions Bancorporation (ZION) has an EBITDA margin of 34.22%, compared to an EBITDA margin of 45.12% for Umpqua Holdings Corporation (UMPQ). This suggests that UMPQ underlying business is more profitable. ZION’s ROI is 20.60% while UMPQ has a ROI of 13.10%. The interpretation is that ZION’s business generates a higher return on investment than UMPQ’s.
If there’s one thing investors care more about than earnings, it’s cash flow. ZION’s free cash flow (“FCF”) per share for the trailing twelve months was +0.46. Comparatively, UMPQ’s free cash flow per share was +0.12. On a percent-of-sales basis, ZION’s free cash flow was 3.76% while UMPQ converted 2.18% of its revenues into cash flow. This means that, for a given level of sales, ZION 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. ZION’s debt-to-equity ratio is 0.05 versus a D/E of 0.31 for UMPQ. UMPQ is therefore the more solvent of the two companies, and has lower financial risk.
ZION trades at a forward P/E of 15.08, a P/B of 1.34, and a P/S of 4.64, compared to a forward P/E of 16.00, a P/B of 1.10, and a P/S of 4.84 for UMPQ. 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. ZION is currently priced at a -4.35% to its one-year price target of $49.83. Comparatively, UMPQ is 0.25% relative to its price target of $19.77. This suggests that ZION 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 2.30 for ZION and 2.70 for UMPQ, which implies that analysts are more bullish on the outlook for UMPQ.
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. ZION has a beta of 1.43 and UMPQ’s beta is 1.15. UMPQ’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. ZION has a short ratio of 7.72 compared to a short interest of 4.17 for UMPQ. This implies that the market is currently less bearish on the outlook for UMPQ.
Zions Bancorporation (NASDAQ:ZION) beats Umpqua Holdings Corporation (NASDAQ:UMPQ) on a total of 9 of the 13 factors compared between the two stocks. ZION is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, ZION is the cheaper of the two stocks on an earnings and sales basis, ZION is more undervalued relative to its price target. Finally, HBAN has better sentiment signals based on short interest.