Investors Bancorp, Inc. (NASDAQ:ISBC) shares are down more than -12.54% this year and recently decreased -0.41% or -$0.05 to settle at $12.14. Kansas City Southern (NYSE:KSU), on the other hand, is down -8.14% year to date as of 11/20/2018. It currently trades at $96.65 and has returned -1.69% during the past week.
Investors Bancorp, Inc. (NASDAQ:ISBC) and Kansas City Southern (NYSE:KSU) are the two most active stocks based on recent 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 consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect ISBC to grow earnings at a 12.00% annual rate over the next 5 years. Comparatively, KSU is expected to grow at a 13.59% annual rate. All else equal, KSU’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., compared to an EBITDA margin of 48.56% for Kansas City Southern (KSU). ISBC’s ROI is 17.90% while KSU has a ROI of 8.40%. The interpretation is that ISBC’s business generates a higher return on investment than KSU’s.Cash Flow
The amount of free cash flow available to investors is ultimately what determines the value of a stock. ISBC’s free cash flow (“FCF”) per share for the trailing twelve months was +0.17. Comparatively, KSU’s free cash flow per share was +1.11. On a percent-of-sales basis, ISBC’s free cash flow was 0.01% while KSU converted 4.37% of its revenues into cash flow. This means that, for a given level of sales, KSU is able to generate more free cash flow for investors.Liquidity and Financial Risk
ISBC’s debt-to-equity ratio is 1.60 versus a D/E of 0.56 for KSU. ISBC is therefore the more solvent of the two companies, and has lower financial risk.
ISBC trades at a forward P/E of 15.83, a P/B of 1.12, and a P/S of 3.75, compared to a forward P/E of 14.01, a P/B of 2.06, and a P/S of 3.67 for KSU. ISBC is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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. ISBC is currently priced at a -8.38% to its one-year price target of 13.25. Comparatively, KSU is -22.85% relative to its price target of 125.28. This suggests that KSU 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. ISBC has a beta of 0.61 and KSU’s beta is 0.84. ISBC’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. ISBC has a short ratio of 2.41 compared to a short interest of 1.98 for KSU. This implies that the market is currently less bearish on the outlook for KSU.Summary
Kansas City Southern (NYSE:KSU) beats Investors Bancorp, Inc. (NASDAQ:ISBC) on a total of 10 of the 14 factors compared between the two stocks. KSU is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, KSU is the cheaper of the two stocks on an earnings and sales basis, KSU is more undervalued relative to its price target. Finally, KSU has better sentiment signals based on short interest.