Cincinnati Financial Corporation (NASDAQ:CINF) shares are down more than -0.88% this year and recently increased 3.01% or $2.17 to settle at $74.31. AmTrust Financial Services, Inc. (NASDAQ:AFSI), on the other hand, is up 26.61% year to date as of 02/12/2018. It currently trades at $12.75 and has returned 0.39% during the past week.
Cincinnati Financial Corporation (NASDAQ:CINF) and AmTrust Financial Services, Inc. (NASDAQ:AFSI) are the two most active stocks in the Property & Casualty Insurance industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect CINF to grow earnings at a 2.46% annual rate over the next 5 years. Comparatively, AFSI is expected to grow at a 10.00% annual rate. All else equal, AFSI’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., compared to an EBITDA margin of 0.35% for AmTrust Financial Services, Inc. (AFSI). CINF’s ROI is 8.10% while AFSI has a ROI of 12.70%. The interpretation is that AFSI’s business generates a higher return on investment than CINF’s.
If there’s one thing investors care more about than earnings, it’s cash flow. On a percent-of-sales basis, CINF’s free cash flow was 0% while AFSI converted -7.45% of its revenues into cash flow. This means that, for a given level of sales, CINF is able to generate more free cash flow for investors.
CINF’s debt-to-equity ratio is 0.11 versus a D/E of 0.56 for AFSI. AFSI is therefore the more solvent of the two companies, and has lower financial risk.
CINF trades at a forward P/E of 22.00, a P/B of 1.62, and a P/S of 2.07, compared to a forward P/E of 9.44, a P/B of 0.96, and a P/S of 0.41 for AFSI. CINF is the expensive 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
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. CINF is currently priced at a -2.74% to its one-year price target of 76.40. Comparatively, AFSI is -9.77% relative to its price target of 14.13. This suggests that AFSI 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 3.00 for CINF and 2.20 for AFSI, which implies that analysts are more bullish on the outlook for CINF.
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. CINF has a beta of 0.91 and AFSI’s beta is 1.23. CINF’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. CINF has a short ratio of 5.14 compared to a short interest of 7.72 for AFSI. This implies that the market is currently less bearish on the outlook for CINF.
AmTrust Financial Services, Inc. (NASDAQ:AFSI) beats Cincinnati Financial Corporation (NASDAQ:CINF) on a total of 7 of the 14 factors compared between the two stocks. AFSI is more profitable and generates a higher return on investment. In terms of valuation, AFSI is the cheaper of the two stocks on an earnings, book value and sales basis, AFSI is more undervalued relative to its price target. Finally, RDN has better sentiment signals based on short interest.