Earnings

A Side-by-side Analysis of U.S. Bancorp (USB) and Fifth Third Bancorp (FITB)

U.S. Bancorp (NYSE:USB) shares are up more than 0.73% this year and recently increased 0.41% or $0.22 to settle at $53.97. Fifth Third Bancorp (NASDAQ:FITB), on the other hand, is up 6.30% year to date as of 02/12/2018. It currently trades at $32.25 and has returned 1.74% during the past week.

U.S. Bancorp (NYSE:USB) and Fifth Third Bancorp (NASDAQ:FITB) 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

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 USB to grow earnings at a 7.67% annual rate over the next 5 years. Comparatively, FITB is expected to grow at a 7.49% annual rate. All else equal, USB’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 57.72% for Fifth Third Bancorp (FITB). USB’s ROI is 10.70% while FITB has a ROI of 9.50%. The interpretation is that USB’s business generates a higher return on investment than FITB’s.

Cash Flow 




If there’s one thing investors care more about than earnings, it’s cash flow. On a percent-of-sales basis, USB’s free cash flow was 0% while FITB converted 0% 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.

Financial Risk

USB’s debt-to-equity ratio is 0.80 versus a D/E of 0.93 for FITB. FITB is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

USB trades at a forward P/E of 12.32, a P/B of 2.08, and a P/S of 6.27, compared to a forward P/E of 12.29, a P/B of 1.55, and a P/S of 5.18 for FITB. USB is the expensive 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

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. USB is currently priced at a -9.29% to its one-year price target of 59.50. Comparatively, FITB is -5.51% relative to its price target of 34.13. This suggests that USB 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 2.80 for USB and 3.00 for FITB, which implies that analysts are more bullish on the outlook for FITB.

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. USB has a beta of 0.89 and FITB’s beta is 1.27. USB’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. USB has a short ratio of 2.67 compared to a short interest of 2.24 for FITB. This implies that the market is currently less bearish on the outlook for FITB.

Summary

U.S. Bancorp (NYSE:USB) beats Fifth Third Bancorp (NASDAQ:FITB) on a total of 7 of the 14 factors compared between the two stocks. USB is growing fastly, generates a higher return on investment, higher liquidity and has lower financial risk. USB is more undervalued relative to its price target. Finally, KEY has better sentiment signals based on short interest.

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