Zions Bancorporation (NASDAQ:ZION) shares are up more than 9.68% this year and recently decreased -1.47% or -$0.83 to settle at $55.75. Novo Nordisk A/S (NYSE:NVO), on the other hand, is down -6.22% year to date as of 03/13/2018. It currently trades at $50.33 and has returned -0.55% during the past week.
Zions Bancorporation (NASDAQ:ZION) and Novo Nordisk A/S (NYSE:NVO) are the two most active stocks in the market based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect ZION to grow earnings at a 10.00% annual rate over the next 5 years. Comparatively, NVO is expected to grow at a 7.50% annual rate. All else equal, ZION’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. Zions Bancorporation (ZION) has an EBITDA margin of 48.05%. This suggests that ZION underlying business is more profitable ZION’s ROI is 23.30% while NVO has a ROI of 74.60%. The interpretation is that NVO’s business generates a higher return on investment than ZION’s.
Cash is king when it comes to investing. On a percent-of-sales basis, ZION’s free cash flow was 0% while NVO converted 20.61% of its revenues into cash flow. This means that, for a given level of sales, NVO is able to generate more free cash flow for investors.
Liquidity and Financial Risk
ZION’s debt-to-equity ratio is 0.05 versus a D/E of 0.03 for NVO. ZION is therefore the more solvent of the two companies, and has lower financial risk.
ZION trades at a forward P/E of 13.82, a P/B of 1.56, and a P/S of 5.00, compared to a forward P/E of 18.05, a P/B of 14.98, and a P/S of 5.34 for NVO. ZION 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
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. ZION is currently priced at a -6.54% to its one-year price target of 59.65. Comparatively, NVO is -16.67% relative to its price target of 60.40. This suggests that NVO 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 ZION and 1.00 for NVO, which implies that analysts are more bullish on the outlook for ZION.
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. ZION has a beta of 1.37 and NVO’s beta is 0.66. NVO’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.ZION has a short ratio of 9.36 compared to a short interest of 1.71 for NVO. This implies that the market is currently less bearish on the outlook for NVO.
Novo Nordisk A/S (NYSE:NVO) beats Zions Bancorporation (NASDAQ:ZION) on a total of 9 of the 14 factors compared between the two stocks. NVO is growing fastly, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, ZION is the cheaper of the two stocks on an earnings, book value and sales basis, NVO is more undervalued relative to its price target. Finally, NVO has better sentiment signals based on short interest.