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Banco Bradesco S.A. (BBD) vs. Dollar General Corporation (DG): Breaking Down the Foreign Regional Banks Industry’s Two Hottest Stocks

Banco Bradesco S.A. (NYSE:BBD) shares are up more than 4.31% this year and recently decreased -1.82% or -$0.18 to settle at $9.69. Dollar General Corporation (NYSE:DG), on the other hand, is up 4.37% year to date as of 04/16/2018. It currently trades at $97.07 and has returned 1.43% during the past week.

Banco Bradesco S.A. (NYSE:BBD) and Dollar General Corporation (NYSE:DG) are the two most active stocks in the Foreign Regional Banks industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

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 BBD to grow earnings at a 19.80% annual rate over the next 5 years. Comparatively, DG is expected to grow at a 15.36% annual rate. All else equal, BBD’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. EBITDA margin of 10.26% for Dollar General Corporation (DG).

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. BBD’s free cash flow (“FCF”) per share for the trailing twelve months was +1.53. Comparatively, DG’s free cash flow per share was +1.59. On a percent-of-sales basis, BBD’s free cash flow was 14.39% while DG converted 1.84% 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 10.53, a P/B of 1.98, and a P/S of 3.40, compared to a forward P/E of 14.49, a P/B of 4.28, and a P/S of 1.12 for DG. 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. BBD is currently priced at a -13.4% to its one-year price target of 11.19. Comparatively, DG is -10.5% relative to its price target of 108.46. This suggests that BBD is the better investment over the next year.

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. BBD has a short ratio of 0.89 compared to a short interest of 1.71 for DG. This implies that the market is currently less bearish on the outlook for BBD.

Summary

Banco Bradesco S.A. (NYSE:BBD) beats Dollar General Corporation (NYSE:DG) on a total of 8 of the 14 factors compared between the two stocks. BBD is growing fastly, has a higher cash conversion rate and has lower financial risk. In terms of valuation, BBD is the cheaper of the two stocks on an earnings and book value, BBD is more undervalued relative to its price target. Finally, BBD has better sentiment signals based on short interest.

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