Valley National Bancorp (NYSE:VLY) shares are down more than -4.30% this year and recently increased 1.00% or $0.11 to settle at $11.14. Fulton Financial Corporation (NASDAQ:FULT), on the other hand, is down -5.32% year to date as of 11/13/2017. It currently trades at $17.80 and has returned -3.00% during the past week.
Valley National Bancorp (NYSE:VLY) and Fulton Financial Corporation (NASDAQ:FULT) are the two most active stocks in the Regional – Northeast 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.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect VLY to grow earnings at a 5.00% annual rate over the next 5 years. Comparatively, FULT is expected to grow at a -2.30% annual rate. All else equal, VLY’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., compared to an EBITDA margin of 40.01% for Fulton Financial Corporation (FULT). VLY’s ROI is 20.50% while FULT has a ROI of 18.60%. The interpretation is that VLY’s business generates a higher return on investment than FULT’s.
The value of a stock is simply the present value of its future free cash flows. VLY’s free cash flow (“FCF”) per share for the trailing twelve months was +0.07. Comparatively, FULT’s free cash flow per share was +0.43. On a percent-of-sales basis, VLY’s free cash flow was 0% while FULT converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, FULT is able to generate more free cash flow for investors.
VLY’s debt-to-equity ratio is 0.97 versus a D/E of 0.17 for FULT. VLY is therefore the more solvent of the two companies, and has lower financial risk.
VLY trades at a forward P/E of 13.89, a P/B of 1.26, and a P/S of 3.57, compared to a forward P/E of 15.46, a P/B of 1.40, and a P/S of 4.79 for FULT. VLY 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. VLY is currently priced at a -13.04% to its one-year price target of 12.81. Comparatively, FULT is -5.62% relative to its price target of 18.86. This suggests that VLY 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 2.70 for VLY and 3.10 for FULT, which implies that analysts are more bullish on the outlook for FULT.
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. VLY has a beta of 0.91 and FULT’s beta is 1.18. VLY’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. VLY has a short ratio of 6.51 compared to a short interest of 5.27 for FULT. This implies that the market is currently less bearish on the outlook for FULT.
Valley National Bancorp (NYSE:VLY) beats Fulton Financial Corporation (NASDAQ:FULT) on a total of 10 of the 14 factors compared between the two stocks. VLY is growing fastly, is more profitable, generates a higher return on investment and higher liquidity. In terms of valuation, VLY is the cheaper of the two stocks on an earnings, book value and sales basis, VLY is more undervalued relative to its price target. Finally, FNB has better sentiment signals based on short interest.