Williams-Sonoma, Inc. (NYSE:WSM) shares are up more than 2.01% this year and recently increased 1.33% or $0.69 to settle at $52.74. SunTrust Banks, Inc. (NYSE:STI), on the other hand, is up 11.89% year to date as of 03/13/2018. It currently trades at $72.27 and has returned 1.69% during the past week.
Williams-Sonoma, Inc. (NYSE:WSM) and SunTrust Banks, Inc. (NYSE:STI) 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.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect WSM to grow earnings at a 4.63% annual rate over the next 5 years. Comparatively, STI is expected to grow at a 14.60% annual rate. All else equal, STI’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 50.07% for SunTrust Banks, Inc. (STI). WSM’s ROI is 24.50% while STI has a ROI of 13.50%. The interpretation is that WSM’s business generates a higher return on investment than STI’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. WSM’s free cash flow (“FCF”) per share for the trailing twelve months was -0.11. Comparatively, STI’s free cash flow per share was -. On a percent-of-sales basis, WSM’s free cash flow was -0.18% while STI converted 0% of its revenues into cash flow. This means that, for a given level of sales, STI is able to generate more free cash flow for investors.
Liquidity and Financial Risk
WSM’s debt-to-equity ratio is 0.15 versus a D/E of 0.43 for STI. STI is therefore the more solvent of the two companies, and has lower financial risk.
WSM trades at a forward P/E of 13.00, a P/B of 3.82, and a P/S of 0.85, compared to a forward P/E of 13.08, a P/B of 1.51, and a P/S of 5.27 for STI. 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. WSM is currently priced at a 4.5% to its one-year price target of 50.47. Comparatively, STI is -3.52% relative to its price target of 74.91. This suggests that STI 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 3.10 for WSM and 2.40 for STI, which implies that analysts are more bullish on the outlook for WSM.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. WSM has a beta of 0.75 and STI’s beta is 1.33. WSM’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. WSM has a short ratio of 12.37 compared to a short interest of 3.01 for STI. This implies that the market is currently less bearish on the outlook for STI.
SunTrust Banks, Inc. (NYSE:STI) beats Williams-Sonoma, Inc. (NYSE:WSM) on a total of 8 of the 14 factors compared between the two stocks. STI generates a higher return on investment, is more profitable, has higher cash flow per share and has a higher cash conversion rate. STI is more undervalued relative to its price target. Finally, STI has better sentiment signals based on short interest.