Finance

Comparing Citigroup Inc. (C) and British American Tobacco p.l.c. (BTI)

Citigroup Inc. (NYSE:C) shares are down more than -3.83% this year and recently decreased -0.54% or -$0.39 to settle at $71.56. British American Tobacco p.l.c. (NYSE:BTI), on the other hand, is down -23.26% year to date as of 05/17/2018. It currently trades at $51.41 and has returned -2.41% during the past week.

Citigroup Inc. (NYSE:C) and British American Tobacco p.l.c. (NYSE:BTI) are the two most active stocks in the Money Center Banks industry 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.

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 C to grow earnings at a 13.95% annual rate over the next 5 years. Comparatively, BTI is expected to grow at a 10.40% annual rate. All else equal, C’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. Citigroup Inc. (C) has an EBITDA margin of 61.87%. This suggests that C underlying business is more profitable C’s ROI is 7.60% while BTI has a ROI of 25.50%. The interpretation is that BTI’s business generates a higher return on investment than C’s.

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. C’s free cash flow (“FCF”) per share for the trailing twelve months was +8.17. Comparatively, BTI’s free cash flow per share was -. On a percent-of-sales basis, C’s free cash flow was 23.87% while BTI converted 0% of its revenues into cash flow. This means that, for a given level of sales, C is able to generate more free cash flow for investors.

Liquidity and Financial Risk

C’s debt-to-equity ratio is 1.22 versus a D/E of 0.81 for BTI. C is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

C trades at a forward P/E of 9.69, a P/B of 1.00, and a P/S of 2.90, compared to a forward P/E of 13.05, a P/B of 1.40, and a P/S of 4.42 for BTI. C 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. C is currently priced at a -14.75% to its one-year price target of 83.94. Comparatively, BTI is -38.06% relative to its price target of 83.00. This suggests that BTI is the better investment over the next year.

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. C has a beta of 1.53 and BTI’s beta is 1.07. BTI’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. C has a short ratio of 1.06 compared to a short interest of 1.83 for BTI. This implies that the market is currently less bearish on the outlook for C.

Summary




Citigroup Inc. (NYSE:C) beats British American Tobacco p.l.c. (NYSE:BTI) on a total of 8 of the 14 factors compared between the two stocks. C is growing fastly, is more profitable, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, C is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, C has better sentiment signals based on short interest.

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