Earnings

Critical Comparison: Zions Bancorporation (ZION) vs. Umpqua Holdings Corporation (UMPQ)

Zions Bancorporation (NASDAQ:ZION) shares are up more than 5.55% this year and recently increased 3.41% or $1.5 to settle at $45.43. Umpqua Holdings Corporation (NASDAQ:UMPQ), on the other hand, is up 7.77% year to date as of 11/13/2017. It currently trades at $20.24 and has returned -1.94% during the past week.

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. 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.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect ZION to grow earnings at a 14.17% 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., compared to an EBITDA margin of 45.09% for Umpqua Holdings Corporation (UMPQ). 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.

Cash Flow 




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 +0.80. Comparatively, UMPQ’s free cash flow per share was +0.26. On a percent-of-sales basis, ZION’s free cash flow was 6.47% while UMPQ converted 4.73% 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.

Financial Risk

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.

Valuation

ZION trades at a forward P/E of 14.42, a P/B of 1.26, and a P/S of 4.31, compared to a forward P/E of 16.35, a P/B of 1.12, and a P/S of 4.82 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

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. ZION is currently priced at a -10.69% to its one-year price target of 50.87. Comparatively, UMPQ is -6.04% relative to its price target of 21.54. 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 2.60 for UMPQ, which implies that analysts are more bullish on the outlook for UMPQ.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. ZION has a beta of 1.47 and UMPQ’s beta is 1.13. UMPQ’s shares are therefore the less volatile of the two stocks.

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. ZION has a short ratio of 8.41 compared to a short interest of 3.98 for UMPQ. This implies that the market is currently less bearish on the outlook for UMPQ.

Summary

Zions Bancorporation (NASDAQ:ZION) beats Umpqua Holdings Corporation (NASDAQ:UMPQ) on a total of 10 of the 14 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, higher liquidity 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, FNB has better sentiment signals based on short interest.

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