PacWest Bancorp (NASDAQ:PACW) shares are up more than 2.36% this year and recently decreased -0.47% or -$0.24 to settle at $51.35. Cathay General Bancorp (NASDAQ:CATY), on the other hand, is up 0.74% year to date as of 02/07/2018. It currently trades at $42.19 and has returned -2.88% during the past week.
PacWest Bancorp (NASDAQ:PACW) and Cathay General Bancorp (NASDAQ:CATY) are the two most active stocks in the Regional – Pacific Banks industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect PACW to grow earnings at a 10.00% annual rate over the next 5 years. Comparatively, CATY is expected to grow at a 8.00% annual rate. All else equal, PACW’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 72.99% for Cathay General Bancorp (CATY). PACW’s ROI is 12.30% while CATY has a ROI of 17.30%. The interpretation is that CATY’s business generates a higher return on investment than PACW’s.
If there’s one thing investors care more about than earnings, it’s cash flow. On a percent-of-sales basis, PACW’s free cash flow was 0% while CATY converted 0% of its revenues into cash flow. This means that, for a given level of sales, PACW is able to generate more free cash flow for investors.
PACW’s debt-to-equity ratio is 0.19 versus a D/E of 0.07 for CATY. PACW is therefore the more solvent of the two companies, and has lower financial risk.
PACW trades at a forward P/E of 13.49, a P/B of 1.26, and a P/S of 6.38, compared to a forward P/E of 12.70, a P/B of 1.74, and a P/S of 6.01 for CATY. PACW is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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. PACW is currently priced at a -10.37% to its one-year price target of 57.29. Comparatively, CATY is -12.34% relative to its price target of 48.13. This suggests that CATY 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 2.20 for PACW and 2.80 for CATY, which implies that analysts are more bullish on the outlook for CATY.
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. PACW has a beta of 1.50 and CATY’s beta is 1.36. CATY’s shares are therefore the less volatile of the two stocks.
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. PACW has a short ratio of 3.73 compared to a short interest of 5.19 for CATY. This implies that the market is currently less bearish on the outlook for PACW.
Cathay General Bancorp (NASDAQ:CATY) beats PacWest Bancorp (NASDAQ:PACW) on a total of 7 of the 14 factors compared between the two stocks. CATY is growing fastly, generates a higher return on investment and has lower financial risk. In terms of valuation, CATY is the cheaper of the two stocks on an earnings and sales basis, CATY is more undervalued relative to its price target. Finally, BSRR has better sentiment signals based on short interest.