Earnings

Dissecting the Numbers for SunTrust Banks, Inc. (STI) and Sterling Bancorp (STL)

SunTrust Banks, Inc. (NYSE:STI) shares are up more than 5.16% this year and recently increased 0.49% or $0.33 to settle at $67.92. Sterling Bancorp (NYSE:STL), on the other hand, is down -5.69% year to date as of 02/12/2018. It currently trades at $23.20 and has returned -1.69% during the past week.

SunTrust Banks, Inc. (NYSE:STI) and Sterling Bancorp (NYSE:STL) are the two most active stocks in the Money Center Banks industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect STI to grow earnings at a 12.20% annual rate over the next 5 years. Comparatively, STL is expected to grow at a 5.00% annual rate. All else equal, STI’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 69.9% for Sterling Bancorp (STL). STI’s ROI is 11.60% while STL has a ROI of 14.90%. The interpretation is that STL’s business generates a higher return on investment than STI’s.

Cash Flow 




Earnings don’t always accurately reflect the amount of cash that a company brings in. On a percent-of-sales basis, STI’s free cash flow was 0% while STL converted 0% of its revenues into cash flow. This means that, for a given level of sales, STI is able to generate more free cash flow for investors.

Financial Risk

STI’s debt-to-equity ratio is 0.50 versus a D/E of 0.22 for STL. STI is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

STI trades at a forward P/E of 12.29, a P/B of 1.44, and a P/S of 5.09, compared to a forward P/E of 10.78, a P/B of 2.24, and a P/S of 7.49 for STL. 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. STI is currently priced at a -8.93% to its one-year price target of 74.58. Comparatively, STL is -24.68% relative to its price target of 30.80. This suggests that STL 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 2.40 for STI and 1.80 for STL, which implies that analysts are more bullish on the outlook for STI.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. STI has a beta of 1.29 and STL’s beta is 1.06. STL’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. STI has a short ratio of 3.21 compared to a short interest of 4.98 for STL. This implies that the market is currently less bearish on the outlook for STI.

Summary

Sterling Bancorp (NYSE:STL) beats SunTrust Banks, Inc. (NYSE:STI) on a total of 7 of the 14 factors compared between the two stocks. STL is growing fastly, generates a higher return on investment and has lower financial risk. STL is more undervalued relative to its price target. Finally, C has better sentiment signals based on short interest.

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