LendingClub Corporation (NYSE:LC) shares are up more than 4.84% this year and recently increased 3.59% or $0.15 to settle at $4.33. Blackhawk Network Holdings, Inc. (NASDAQ:HAWK), on the other hand, is up 3.79% year to date as of 01/11/2018. It currently trades at $37.00 and has returned 2.78% during the past week.
LendingClub Corporation (NYSE:LC) and Blackhawk Network Holdings, Inc. (NASDAQ:HAWK) are the two most active stocks in the Credit Services industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
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 LC to grow earnings at a -8.60% annual rate over the next 5 years. Comparatively, HAWK is expected to grow at a 15.52% annual rate. All else equal, HAWK’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 6.33% for Blackhawk Network Holdings, Inc. (HAWK). LC’s ROI is -2.80% while HAWK has a ROI of 2.00%. The interpretation is that HAWK’s business generates a higher return on investment than LC’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. LC’s free cash flow (“FCF”) per share for the trailing twelve months was -0.34. Comparatively, HAWK’s free cash flow per share was +0.70. On a percent-of-sales basis, LC’s free cash flow was -11.85% while HAWK converted 2.09% of its revenues into cash flow. This means that, for a given level of sales, HAWK is able to generate more free cash flow for investors.
Liquidity and Financial Risk
LC’s debt-to-equity ratio is 3.54 versus a D/E of 0.76 for HAWK. LC is therefore the more solvent of the two companies, and has lower financial risk.
LC trades at a forward P/E of 45.10, a P/B of 1.80, and a P/S of 1.56, compared to a forward P/E of 17.85, a P/B of 2.55, and a P/S of 1.02 for HAWK. LC 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
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. LC is currently priced at a -18.3% to its one-year price target of 5.30. Comparatively, HAWK is -17.39% relative to its price target of 44.79. This suggests that LC 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 2.30 for LC and 2.00 for HAWK, which implies that analysts are more bullish on the outlook for LC.
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. LC has a short ratio of 3.53 compared to a short interest of 4.64 for HAWK. This implies that the market is currently less bearish on the outlook for LC.
Blackhawk Network Holdings, Inc. (NASDAQ:HAWK) beats LendingClub Corporation (NYSE:LC) on a total of 9 of the 14 factors compared between the two stocks. HAWK is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, HAWK is the cheaper of the two stocks on an earnings and sales basis, Finally, PYPL has better sentiment signals based on short interest.