Earnings

A Side-by-side Analysis of Citizens Financial Group, Inc. (CFG) and BankUnited, Inc. (BKU)

Citizens Financial Group, Inc. (NYSE:CFG) shares are up more than 4.41% this year and recently increased 1.42% or $0.52 to settle at $37.20. BankUnited, Inc. (NYSE:BKU), on the other hand, is down -10.93% year to date as of 11/13/2017. It currently trades at $33.57 and has returned 0.84% during the past week.

Citizens Financial Group, Inc. (NYSE:CFG) and BankUnited, Inc. (NYSE:BKU) are the two most active stocks in the Regional – Mid-Atlantic 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

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 CFG to grow earnings at a 16.02% annual rate over the next 5 years. Comparatively, BKU is expected to grow at a 13.84% annual rate. All else equal, CFG’s higher growth rate would imply a greater potential for capital appreciation.



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 EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 67.9% for BankUnited, Inc. (BKU). CFG’s ROI is 9.00% while BKU has a ROI of 29.20%. The interpretation is that BKU’s business generates a higher return on investment than CFG’s.

Cash Flow 




Cash is king when it comes to investing. CFG’s free cash flow (“FCF”) per share for the trailing twelve months was +1.34. Comparatively, BKU’s free cash flow per share was +0.56. On a percent-of-sales basis, CFG’s free cash flow was 11.44% while BKU converted 5.13% of its revenues into cash flow. This means that, for a given level of sales, CFG is able to generate more free cash flow for investors.

Financial Risk

CFG’s debt-to-equity ratio is 0.67 versus a D/E of 0.00 for BKU. CFG is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

CFG trades at a forward P/E of 13.16, a P/B of 0.94, and a P/S of 3.87, compared to a forward P/E of 12.84, a P/B of 1.37, and a P/S of 3.04 for BKU. CFG is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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”. CFG is currently priced at a -8.82% to its one-year price target of 40.80. Comparatively, BKU is -14.47% relative to its price target of 39.25. This suggests that BKU 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 CFG and 2.40 for BKU, which implies that analysts are equally bullish on their outlook for the two stocks.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. CFG has a short ratio of 3.26 compared to a short interest of 0.99 for BKU. This implies that the market is currently less bearish on the outlook for BKU.

Summary

BankUnited, Inc. (NYSE:BKU) beats Citizens Financial Group, Inc. (NYSE:CFG) on a total of 7 of the 14 factors compared between the two stocks. BKU is growing fastly, generates a higher return on investment and has lower financial risk. In terms of valuation, BKU is the cheaper of the two stocks on an earnings and sales basis, BKU is more undervalued relative to its price target. Finally, BKU has better sentiment signals based on short interest.

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