Global

Banco Santander, S.A. (SAN) vs. NiSource Inc. (NI): Which is the Better Investment?

Banco Santander, S.A. (NYSE:SAN) shares are down more than -3.67% this year and recently decreased -0.16% or -$0.01 to settle at $6.30. NiSource Inc. (NYSE:NI), on the other hand, is down -5.10% year to date as of 05/17/2018. It currently trades at $24.36 and has returned -2.21% during the past week.

Banco Santander, S.A. (NYSE:SAN) and NiSource Inc. (NYSE:NI) are the two most active stocks in the Foreign Money Center Banks industry 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 SAN to grow earnings at a 12.87% annual rate over the next 5 years. Comparatively, NI is expected to grow at a 5.70% annual rate. All else equal, SAN’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. EBITDA margin of 21.23% for NiSource Inc. (NI). SAN’s ROI is 6.80% while NI has a ROI of 3.60%. The interpretation is that SAN’s business generates a higher return on investment than NI’s.

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. On a percent-of-sales basis, SAN’s free cash flow was 0% while NI converted -0.97% of its revenues into cash flow. This means that, for a given level of sales, SAN is able to generate more free cash flow for investors.

Liquidity and Financial Risk

SAN’s debt-to-equity ratio is 2.36 versus a D/E of 2.02 for NI. SAN is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

SAN trades at a forward P/E of 11.95, a P/B of 0.95, and a P/S of 1.61, compared to a forward P/E of 17.78, a P/B of 1.83, and a P/S of 1.64 for NI. SAN 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

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. SAN is currently priced at a -17.32% to its one-year price target of 7.62. Comparatively, NI is -6.99% relative to its price target of 26.19. This suggests that SAN is the better investment over the next year.

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. SAN has a beta of 1.58 and NI’s beta is 0.24. NI’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. SAN has a short ratio of 1.46 compared to a short interest of 2.89 for NI. This implies that the market is currently less bearish on the outlook for SAN.

Summary




Banco Santander, S.A. (NYSE:SAN) beats NiSource Inc. (NYSE:NI) on a total of 9 of the 14 factors compared between the two stocks. SAN is growing fastly, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, SAN is the cheaper of the two stocks on an earnings, book value and sales basis, SAN is more undervalued relative to its price target. Finally, SAN has better sentiment signals based on short interest.

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