BB&T Corporation (NYSE:BBT) shares are up more than 4.67% this year and recently increased 0.10% or $0.05 to settle at $52.00. Sempra Energy (NYSE:SRE), on the other hand, is up 4.55% year to date as of 04/16/2018. It currently trades at $111.79 and has returned 0.01% during the past week.
BB&T Corporation (NYSE:BBT) and Sempra Energy (NYSE:SRE) are the two most active stocks in the Regional – Southeast Banks 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.Growth
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect BBT to grow earnings at a 4.10% annual rate over the next 5 years. Comparatively, SRE is expected to grow at a 4.90% annual rate. All else equal, SRE’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. BB&T Corporation (BBT) has an EBITDA margin of 43.78%. This suggests that BBT underlying business is more profitable BBT’s ROI is 9.60% while SRE has a ROI of 4.80%. The interpretation is that BBT’s business generates a higher return on investment than SRE’s.Cash Flow
The amount of free cash flow available to investors is ultimately what determines the value of a stock. On a percent-of-sales basis, BBT’s free cash flow was 0% while SRE converted -3.14% of its revenues into cash flow. This means that, for a given level of sales, BBT is able to generate more free cash flow for investors.Liquidity and Financial Risk
BBT’s debt-to-equity ratio is 0.80 versus a D/E of 1.53 for SRE. SRE is therefore the more solvent of the two companies, and has lower financial risk.
BBT trades at a forward P/E of 12.21, a P/B of 1.53, and a P/S of 5.60, compared to a forward P/E of 16.99, a P/B of 2.22, and a P/S of 2.63 for SRE. 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”. BBT is currently priced at a -9.83% to its one-year price target of 57.67. Comparatively, SRE is -7% relative to its price target of 120.20. This suggests that BBT is the better investment over the next year.
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. BBT has a beta of 1.04 and SRE’s beta is 0.50. SRE’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. BBT has a short ratio of 2.00 compared to a short interest of 6.48 for SRE. This implies that the market is currently less bearish on the outlook for BBT.Summary
BB&T Corporation (NYSE:BBT) beats Sempra Energy (NYSE:SRE) on a total of 9 of the 14 factors compared between the two stocks. BBT is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, BBT is the cheaper of the two stocks on an earnings and book value, BBT is more undervalued relative to its price target. Finally, BBT has better sentiment signals based on short interest.