AmTrust Financial Services, Inc. (NASDAQ:AFSI) shares are down more than -65.34% this year and recently decreased -7.86% or -$0.81 to settle at $9.49. Radian Group Inc. (NYSE:RDN), on the other hand, is up 11.01% year to date as of 11/13/2017. It currently trades at $19.96 and has returned -1.24% during the past week.
AmTrust Financial Services, Inc. (NASDAQ:AFSI) and Radian Group Inc. (NYSE:RDN) are the two most active stocks in the Property & Casualty Insurance industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect AFSI to grow earnings at a 10.00% annual rate over the next 5 years. Comparatively, RDN is expected to grow at a 10.59% annual rate. All else equal, RDN’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. , compared to an EBITDA margin of 28.63% for Radian Group Inc. (RDN). AFSI’s ROI is 12.70% while RDN has a ROI of 9.90%. The interpretation is that AFSI’s business generates a higher return on investment than RDN’s.
If there’s one thing investors care more about than earnings, it’s cash flow. AFSI’s free cash flow (“FCF”) per share for the trailing twelve months was -2.07. Comparatively, RDN’s free cash flow per share was +0.00. On a percent-of-sales basis, AFSI’s free cash flow was -7.45% while RDN converted 0% of its revenues into cash flow. This means that, for a given level of sales, RDN is able to generate more free cash flow for investors.
AFSI’s debt-to-equity ratio is 0.56 versus a D/E of 0.34 for RDN. AFSI is therefore the more solvent of the two companies, and has lower financial risk.
AFSI trades at a forward P/E of 6.70, a P/B of 0.72, and a P/S of 0.33, compared to a forward P/E of 10.19, a P/B of 1.44, and a P/S of 3.70 for RDN. AFSI 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. AFSI is currently priced at a -37.57% to its one-year price target of 15.20. Comparatively, RDN is -13.89% relative to its price target of 23.18. This suggests that AFSI 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 AFSI and 1.80 for RDN, which implies that analysts are more bullish on the outlook for AFSI.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. AFSI has a beta of 1.27 and RDN’s beta is 1.59. AFSI’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. AFSI has a short ratio of 11.78 compared to a short interest of 2.03 for RDN. This implies that the market is currently less bearish on the outlook for RDN.
Radian Group Inc. (NYSE:RDN) beats AmTrust Financial Services, Inc. (NASDAQ:AFSI) on a total of 7 of the 14 factors compared between the two stocks. RDN generates a higher return on investment, is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, AFSI is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, RDN has better sentiment signals based on short interest.