Earnings

Critical Comparison: Bank of America Corporation (BAC) vs. U.S. Bancorp (USB)

Bank of America Corporation (NYSE:BAC) shares are up more than 8.40% this year and recently increased 2.63% or $0.82 to settle at $32.00. U.S. Bancorp (NYSE:USB), on the other hand, is up 3.23% year to date as of 02/14/2018. It currently trades at $55.31 and has returned 0.93% during the past week.

Bank of America Corporation (NYSE:BAC) and U.S. Bancorp (NYSE:USB) are the two most active stocks in the market 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.

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 BAC to grow earnings at a 15.03% annual rate over the next 5 years. Comparatively, USB is expected to grow at a 7.67% annual rate. All else equal, BAC’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 52.73% for U.S. Bancorp (USB). BAC’s ROI is 4.40% while USB has a ROI of 10.70%. The interpretation is that USB’s business generates a higher return on investment than BAC’s.

Cash Flow 




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

Financial Risk

BAC’s debt-to-equity ratio is 1.82 versus a D/E of 0.80 for USB. BAC is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

BAC trades at a forward P/E of 11.15, a P/B of 1.31, and a P/S of 5.61, compared to a forward P/E of 12.62, a P/B of 2.14, and a P/S of 6.43 for USB. BAC 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

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. BAC is currently priced at a -5.97% to its one-year price target of 34.03. Comparatively, USB is -7.04% relative to its price target of 59.50. This suggests that USB 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 2.10 for BAC and 2.80 for USB, which implies that analysts are more bullish on the outlook for USB.

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. BAC has a beta of 1.33 and USB’s beta is 0.89. USB’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. BAC has a short ratio of 1.73 compared to a short interest of 2.66 for USB. This implies that the market is currently less bearish on the outlook for BAC.

Summary

Bank of America Corporation (NYSE:BAC) beats U.S. Bancorp (NYSE:USB) on a total of 7 of the 14 factors compared between the two stocks. BAC is growing fastly and higher liquidity. In terms of valuation, BAC is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, BAC has better sentiment signals based on short interest.

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