Simmons First National Corporation (NASDAQ:SFNC) and State Bank Financial Corporation (NASDAQ:STBZ) are the two most active stocks in the Money Center Banks industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
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 SFNC to grow earnings at a 5.00% annual rate over the next 5 years. Comparatively, STBZ is expected to grow at a 11.80% annual rate. All else equal, STBZ’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Simmons First National Corporation (SFNC) has an EBITDA margin of 79.3%, compared to an EBITDA margin of 37.98% for State Bank Financial Corporation (STBZ). This suggests that SFNC underlying business is more profitable. SFNC’s ROI is 16.90% while STBZ has a ROI of 21.00%. The interpretation is that STBZ’s business generates a higher return on investment than SFNC’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. SFNC’s free cash flow (“FCF”) per share for the trailing twelve months was +0.90. Comparatively, STBZ’s free cash flow per share was -0.09. On a percent-of-sales basis, SFNC’s free cash flow was 0.01% while STBZ converted -0% of its revenues into cash flow. This means that, for a given level of sales, SFNC is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. SFNC’s debt-to-equity ratio is 0.09 versus a D/E of 0.00 for STBZ. SFNC is therefore the more solvent of the two companies, and has lower financial risk.
SFNC trades at a forward P/E of 13.75, a P/B of 1.34, and a P/S of 5.37, compared to a forward P/E of 14.42, a P/B of 1.61, and a P/S of 5.89 for STBZ. SFNC 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. SFNC is currently priced at a -15.55% to its one-year price target of $61.75. Comparatively, STBZ is -10.79% relative to its price target of $30.04. This suggests that SFNC 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 2.40 for SFNC and 2.40 for STBZ, which implies that analysts are equally bullish on their outlook for the two stocks.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. SFNC has a beta of 1.15 and STBZ’s beta is 0.98. STBZ’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. SFNC has a short ratio of 14.68 compared to a short interest of 4.49 for STBZ. This implies that the market is currently less bearish on the outlook for STBZ.
Simmons First National Corporation (NASDAQ:SFNC) beats State Bank Financial Corporation (NASDAQ:STBZ) on a total of 7 of the 13 factors compared between the two stocks. SFNC is more profitable, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, SFNC is the cheaper of the two stocks on an earnings, book value and sales basis, SFNC is more undervalued relative to its price target. Finally, OPB has better sentiment signals based on short interest.