Earnings

A Side-by-side Analysis of Franklin Resources, Inc. (BEN) and Lloyds Banking Group plc (LYG)

 

Franklin Resources, Inc. (NYSE:BEN) shares are down more than -14.45% this year and recently decreased -1.44% or -$0.5 to settle at $34.11. Lloyds Banking Group plc (NYSE:LYG), on the other hand, is down -0.80% year to date as of 03/28/2018. It currently trades at $3.72 and has returned -3.38% during the past week.

Franklin Resources, Inc. (NYSE:BEN) and Lloyds Banking Group plc (NYSE:LYG) are the two most active stocks in the market based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

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 BEN to grow earnings at a 6.07% annual rate over the next 5 years. Comparatively, LYG is expected to grow at a -6.50% annual rate. All else equal, BEN’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. Franklin Resources, Inc. (BEN) has an EBITDA margin of 43.2%. This suggests that BEN underlying business is more profitable BEN’s ROI is 11.00% while LYG has a ROI of 6.10%. The interpretation is that BEN’s business generates a higher return on investment than LYG’s.

Cash Flow 




The amount of free cash flow available to investors is ultimately what determines the value of a stock. BEN’s free cash flow (“FCF”) per share for the trailing twelve months was +0.65. Comparatively, LYG’s free cash flow per share was -. On a percent-of-sales basis, BEN’s free cash flow was 5.61% while LYG converted 0% of its revenues into cash flow. This means that, for a given level of sales, BEN is able to generate more free cash flow for investors.

Financial Risk

BEN’s debt-to-equity ratio is 0.09 versus a D/E of 1.85 for LYG. LYG is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

BEN trades at a forward P/E of 10.09, a P/B of 1.60, and a P/S of 2.97, compared to a forward P/E of 10.94, a P/B of 0.97, and a P/S of 3.02 for LYG. 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. BEN is currently priced at a -21.37% to its one-year price target of 43.38. Comparatively, LYG is 27.4% relative to its price target of 2.92. This suggests that BEN 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 3.20 for BEN and 4.00 for LYG, which implies that analysts are more bullish on the outlook for LYG.

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. BEN has a beta of 1.61 and LYG’s beta is 0.90. LYG’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.BEN has a short ratio of 2.32 compared to a short interest of 2.30 for LYG. This implies that the market is currently less bearish on the outlook for LYG.

Summary

Franklin Resources, Inc. (NYSE:BEN) beats Lloyds Banking Group plc (NYSE:LYG) on a total of 11 of the 14 factors compared between the two stocks. BEN is growing fastly, is more profitable, 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, BEN is the cheaper of the two stocks on an earnings and sales basis, BEN is more undervalued relative to its price target. Finally, GG has better sentiment signals based on short interest.

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