Finance

Choosing Between Banco Bradesco S.A. (BBD) and Netflix, Inc. (NFLX)

Banco Bradesco S.A. (NYSE:BBD) shares are down more than -8.01% this year and recently decreased -5.16% or -$0.46 to settle at $8.45. Netflix, Inc. (NASDAQ:NFLX), on the other hand, is up 69.77% year to date as of 10/10/2018. It currently trades at $325.89 and has returned -13.57% during the past week.

Banco Bradesco S.A. (NYSE:BBD) and Netflix, Inc. (NASDAQ:NFLX) are the two most active stocks in the Foreign Regional 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.

Growth

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 BBD to grow earnings at a 20.30% annual rate over the next 5 years. Comparatively, NFLX is expected to grow at a 59.64% annual rate. All else equal, NFLX’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. EBITDA margin of 9.85% for Netflix, Inc. (NFLX).

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. BBD’s free cash flow (“FCF”) per share for the trailing twelve months was +0.36. Comparatively, NFLX’s free cash flow per share was -1.21. On a percent-of-sales basis, BBD’s free cash flow was 3.08% while NFLX converted -4.51% of its revenues into cash flow. This means that, for a given level of sales, BBD is able to generate more free cash flow for investors.

Valuation

BBD trades at a forward P/E of 9.83, a P/B of 1.90, and a P/S of 3.69, compared to a forward P/E of 74.75, a P/B of 31.55, and a P/S of 10.58 for NFLX. BBD 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. BBD is currently priced at a -11.7% to its one-year price target of 9.57. Comparatively, NFLX is -14.68% relative to its price target of 381.95. This suggests that NFLX is the better investment over the next year.

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. BBD has a short ratio of 1.36 compared to a short interest of 1.59 for NFLX. This implies that the market is currently less bearish on the outlook for BBD.

Summary

Banco Bradesco S.A. (NYSE:BBD) beats Netflix, Inc. (NASDAQ:NFLX) on a total of 8 of the 14 factors compared between the two stocks. BBD has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, BBD is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, BBD has better sentiment signals based on short interest.

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