Union Bankshares Corporation (NASDAQ:UBSH) and TowneBank (NASDAQ:TOWN) are the two most active stocks in the Regional – Mid-Atlantic Banks industry 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.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use Return on Investment (ROI) to measure this. UBSH’s ROI is 16.20% while TOWN has a ROI of 17.20%. The interpretation is that TOWN’s business generates a higher return on investment than UBSH’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. UBSH’s free cash flow (“FCF”) per share for the trailing twelve months was +0.18. Comparatively, TOWN’s free cash flow per share was -0.61. On a percent-of-sales basis, UBSH’s free cash flow was 0% while TOWN converted -0.01% of its revenues into cash flow. This means that, for a given level of sales, UBSH is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. UBSH’s debt-to-equity ratio is 0.42 versus a D/E of 0.00 for TOWN. UBSH is therefore the more solvent of the two companies, and has lower financial risk.
UBSH trades at a forward P/E of 13.79, a P/B of 1.35, and a P/S of 4.60, compared to a forward P/E of 15.75, a P/B of 1.72, and a P/S of 6.69 for TOWN. UBSH 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
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. UBSH is currently priced at a -15.2% to its one-year price target of $37.50. Comparatively, TOWN is -2.9% relative to its price target of $31.67. This suggests that UBSH 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 2.00 for UBSH and 3.00 for TOWN, which implies that analysts are more bullish on the outlook for TOWN.
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. UBSH has a beta of 1.20 and TOWN’s beta is 1.00. TOWN’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. UBSH has a short ratio of 8.94 compared to a short interest of 8.27 for TOWN. This implies that the market is currently less bearish on the outlook for TOWN.
Union Bankshares Corporation (NASDAQ:UBSH) beats TowneBank (NASDAQ:TOWN) on a total of 7 of the 11 factors compared between the two stocks. UBSH has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, UBSH is the cheaper of the two stocks on an earnings, book value and sales basis, UBSH is more undervalued relative to its price target. Finally, UCBI has better sentiment signals based on short interest.