Earnings

Dissecting the Numbers for Huntington Bancshares Incorporated (HBAN) and U.S. Bancorp (USB)

Huntington Bancshares Incorporated (NASDAQ:HBAN) and U.S. Bancorp (NYSE:USB) are the two most active stocks in the Regional – Midwest 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.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect HBAN to grow earnings at a 8.96% annual rate over the next 5 years. Comparatively, USB is expected to grow at a 6.21% annual rate. All else equal, HBAN’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. Huntington Bancshares Incorporated (HBAN) has an EBITDA margin of 48.69%, compared to an EBITDA margin of 52.07% for U.S. Bancorp (USB). This suggests that USB underlying business is more profitable. HBAN’s ROI is 11.20% while USB has a ROI of 10.70%. The interpretation is that HBAN’s business generates a higher return on investment than USB’s.

Cash Flow 

The amount of free cash flow available to investors is ultimately what determines the value of a stock. HBAN’s free cash flow (“FCF”) per share for the trailing twelve months was +0.22. Comparatively, USB’s free cash flow per share was +1.09. On a percent-of-sales basis, HBAN’s free cash flow was 6.34% while USB converted 8.01% of its revenues into cash flow. This means that, for a given level of sales, USB is able to generate more free cash flow for investors.




Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. HBAN’s debt-to-equity ratio is 0.89 versus a D/E of 0.88 for USB. HBAN is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

HBAN trades at a forward P/E of 11.52, a P/B of 1.43, and a P/S of 4.30, compared to a forward P/E of 13.56, a P/B of 2.02, and a P/S of 6.30 for USB. HBAN 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”. HBAN is currently priced at a -15.1% to its one-year price target of $14.83. Comparatively, USB is -5.88% relative to its price target of $54.72. This suggests that HBAN 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 2.20 for HBAN and 2.70 for USB, which implies that analysts are more bullish on the outlook for USB.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. HBAN has a beta of 1.38 and USB’s beta is 0.87. USB’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. HBAN has a short ratio of 2.29 compared to a short interest of 2.80 for USB. This implies that the market is currently less bearish on the outlook for HBAN.

Summary

Huntington Bancshares Incorporated (NASDAQ:HBAN) beats U.S. Bancorp (NYSE:USB) on a total of 8 of the 13 factors compared between the two stocks. HBAN is growing fastly and generates a higher return on investment. In terms of valuation, HBAN is the cheaper of the two stocks on an earnings, book value and sales basis, HBAN is more undervalued relative to its price target. Finally, HBAN has better sentiment signals based on short interest.

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