Earnings

Banco Bradesco S.A. (BBD) vs. PagSeguro Digital Ltd. (PAGS): Which is the Better Investment?

Banco Bradesco S.A. (NYSE:BBD) shares are up more than 15.01% this year and recently decreased -1.02% or -$0.11 to settle at $10.69. PagSeguro Digital Ltd. (NYSE:PAGS), on the other hand, is up 31.06% year to date as of 04/02/2018. It currently trades at $38.27 and has returned 6.72% during the past week.

Banco Bradesco S.A. (NYSE:BBD) and PagSeguro Digital Ltd. (NYSE:PAGS) are the two most active stocks in the Foreign Regional 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.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect BBD to grow earnings at a 19.80% annual rate over the next 5 years. Comparatively, PAGS is expected to grow at a 27.94% annual rate. All else equal, PAGS’s higher growth rate would imply a greater potential for capital appreciation.
Cash Flow

Earnings don’t always accurately reflect the amount of cash that a company brings in. BBD’s free cash flow (“FCF”) per share for the trailing twelve months was +1.68. Comparatively, PAGS’s free cash flow per share was +0.27. On a percent-of-sales basis, BBD’s free cash flow was 14.37% while PAGS converted 0% of its revenues into cash flow. This means that, for a given level of sales, BBD is able to generate more free cash flow for investors.
Valuation



BBD trades at a forward P/E of 9.54, a P/B of 1.93, and a P/S of 3.65, compared to a forward P/E of 39.78, a P/B of 38.08, and a P/S of 14.99 for PAGS. BBD 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

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. BBD is currently priced at a -11.65% to its one-year price target of 12.10. Comparatively, PAGS is 9.72% relative to its price target of 34.88. This suggests that BBD is the better investment over the next year.

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. BBD has a short ratio of 0.66 compared to a short interest of 0.31 for PAGS. This implies that the market is currently less bearish on the outlook for PAGS.

Summary

PagSeguro Digital Ltd. (NYSE:PAGS) beats Banco Bradesco S.A. (NYSE:BBD) on a total of 6 of the 14 factors compared between the two stocks. PAGS has higher cash flow per share, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, BBD is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, PAGS has better sentiment signals based on short interest.

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