Royal Bancshares of Pennsylvania, Inc. (NASDAQ:RBPAA) shares are up more than 6.51% this year and recently increased 0.45% or $0.02 to settle at $4.42. Melrose Bancorp, Inc. (NASDAQ:MELR), on the other hand, is up 3.90% year to date as of 11/23/2017. It currently trades at $18.65 and has returned -0.57% during the past week.
Royal Bancshares of Pennsylvania, Inc. (NASDAQ:RBPAA) and Melrose Bancorp, Inc. (NASDAQ:MELR) are the two most active stocks in the Regional – Northeast 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.
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 71.82% for Melrose Bancorp, Inc. (MELR). RBPAA’s ROI is 16.40% while MELR has a ROI of 10.80%. The interpretation is that RBPAA’s business generates a higher return on investment than MELR’s.
The value of a stock is simply the present value of its future free cash flows. RBPAA’s free cash flow (“FCF”) per share for the trailing twelve months was +0.12. Comparatively, MELR’s free cash flow per share was +0.16. On a percent-of-sales basis, RBPAA’s free cash flow was 0.01% while MELR converted 0% of its revenues into cash flow. This means that, for a given level of sales, RBPAA is able to generate more free cash flow for investors.
RBPAA’s debt-to-equity ratio is 1.49 versus a D/E of 0.00 for MELR. RBPAA is therefore the more solvent of the two companies, and has lower financial risk.
RBPAA trades at a P/B of 2.31, and a P/S of 3.61, compared to a forward P/E of 20.72, a P/B of 0.99, and a P/S of 5.51 for MELR. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. RBPAA has a short ratio of 1.21 compared to a short interest of 1.45 for MELR. This implies that the market is currently less bearish on the outlook for RBPAA.
Royal Bancshares of Pennsylvania, Inc. (NASDAQ:RBPAA) beats Melrose Bancorp, Inc. (NASDAQ:MELR) on a total of 7 of the 13 factors compared between the two stocks. RBPAA generates a higher return on investment, has a higher cash conversion rate and higher liquidity. In terms of valuation, RBPAA is the cheaper of the two stocks on an earnings and sales basis, Finally, RBPAA has better sentiment signals based on short interest.