Earnings

Wells Fargo & Company (WFC) and Citigroup Inc. (C) Go Head-to-head

Wells Fargo & Company (NYSE:WFC) shares are down more than -1.85% this year and recently increased 2.67% or $1.55 to settle at $59.55. Citigroup Inc. (NYSE:C), on the other hand, is up 3.09% year to date as of 02/14/2018. It currently trades at $76.71 and has returned 2.29% during the past week.

Wells Fargo & Company (NYSE:WFC) and Citigroup Inc. (NYSE:C) are the two most active stocks in the market 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.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect WFC to grow earnings at a 9.37% annual rate over the next 5 years. Comparatively, C is expected to grow at a 14.08% annual rate. All else equal, C’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 58.62% for Citigroup Inc. (C). WFC’s ROI is 7.90% while C has a ROI of 8.20%. The interpretation is that C’s business generates a higher return on investment than WFC’s.

Cash Flow 




The amount of free cash flow available to investors is ultimately what determines the value of a stock. On a percent-of-sales basis, WFC’s free cash flow was 0% while C converted 0% of its revenues into cash flow. This means that, for a given level of sales, WFC is able to generate more free cash flow for investors.

Financial Risk

WFC’s debt-to-equity ratio is 1.32 versus a D/E of 1.02 for C. WFC is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

WFC trades at a forward P/E of 11.09, a P/B of 1.63, and a P/S of 4.99, compared to a forward P/E of 10.37, a P/B of 0.98, and a P/S of 3.32 for C. WFC 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

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. WFC is currently priced at a -7.08% to its one-year price target of 64.09. Comparatively, C is -8.97% relative to its price target of 84.27. This suggests that C 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 WFC and 2.30 for C, which implies that analysts are more bullish on the outlook for WFC.

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. WFC has a beta of 1.13 and C’s beta is 1.44. WFC’s shares are therefore the less volatile of 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. WFC has a short ratio of 1.56 compared to a short interest of 1.67 for C. This implies that the market is currently less bearish on the outlook for WFC.

Summary

Citigroup Inc. (NYSE:C) beats Wells Fargo & Company (NYSE:WFC) on a total of 9 of the 14 factors compared between the two stocks. C higher liquidity, is more profitable, generates a higher return on investment and has lower financial risk. In terms of valuation, C is the cheaper of the two stocks on an earnings, book value and sales basis, C is more undervalued relative to its price target. Finally, CSX has better sentiment signals based on short interest.

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