Bank of America Corporation (NYSE:BAC) shares are up more than 4.37% this year and recently decreased -0.80% or -$0.25 to settle at $30.81. Visa Inc. (NYSE:V), on the other hand, is up 13.95% year to date as of 05/17/2018. It currently trades at $129.93 and has returned -0.82% during the past week.
Bank of America Corporation (NYSE:BAC) and Visa Inc. (NYSE:V) are the two most active stocks in the Money Center Banks industry 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
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect BAC to grow earnings at a 21.73% annual rate over the next 5 years. Comparatively, V is expected to grow at a 18.06% annual rate. All else equal, BAC’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 70.48% for Visa Inc. (V). BAC’s ROI is 4.80% while V has a ROI of 15.70%. The interpretation is that V’s business generates a higher return on investment than BAC’s.Cash Flow
If there’s one thing investors care more about than earnings, it’s cash flow. BAC’s free cash flow (“FCF”) per share for the trailing twelve months was +3.30. Comparatively, V’s free cash flow per share was +0.91. On a percent-of-sales basis, BAC’s free cash flow was 33.71% while V converted 10.13% of its revenues into cash flow. This means that, for a given level of sales, BAC is able to generate more free cash flow for investors.Liquidity and Financial Risk
BAC’s debt-to-equity ratio is 1.83 versus a D/E of 0.58 for V. BAC is therefore the more solvent of the two companies, and has lower financial risk.
BAC trades at a forward P/E of 10.62, a P/B of 1.32, and a P/S of 5.35, compared to a forward P/E of 24.67, a P/B of 10.21, and a P/S of 15.04 for V. BAC 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
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. BAC is currently priced at a -11.74% to its one-year price target of 34.91. Comparatively, V is -7.25% relative to its price target of 140.09. This suggests that BAC is the better investment over the next year.
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. BAC has a beta of 1.35 and V’s beta is 0.98. V’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. BAC has a short ratio of 1.79 compared to a short interest of 3.84 for V. This implies that the market is currently less bearish on the outlook for BAC.Summary
Bank of America Corporation (NYSE:BAC) beats Visa Inc. (NYSE:V) on a total of 8 of the 14 factors compared between the two stocks. BAC is growing fastly, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, BAC is the cheaper of the two stocks on an earnings, book value and sales basis, BAC is more undervalued relative to its price target. Finally, BAC has better sentiment signals based on short interest.