Financial Analysis: Preferred Bank (NASDAQ:PFBC) vs. FS Bancorp (NASDAQ:FSBW)

FS Bancorp (NASDAQ:FSBW) and Preferred Bank (NASDAQ:PFBC) are both small-cap finance companies, but which is the better investment? We will compare the two businesses based on the strength of their valuation, risk, analyst recommendations, profitability, institutional ownership, dividends and earnings.

Dividends

FS Bancorp pays an annual dividend of $1.12 per share and has a dividend yield of 2.7%. Preferred Bank pays an annual dividend of $3.00 per share and has a dividend yield of 3.3%. FS Bancorp pays out 27.3% of its earnings in the form of a dividend. Preferred Bank pays out 30.5% of its earnings in the form of a dividend. Both companies have healthy payout ratios and should be able to cover their dividend payments with earnings for the next several years. FS Bancorp has increased its dividend for 12 consecutive years and Preferred Bank has increased its dividend for 5 consecutive years.

Analyst Recommendations

This is a summary of current ratings for FS Bancorp and Preferred Bank, as reported by MarketBeat.com.

	Sell Ratings	Hold Ratings	Buy Ratings	Strong Buy Ratings	Rating Score
FS Bancorp	0	1	1	0	2.50
Preferred Bank	0	2	2	1	2.80

FS Bancorp presently has a consensus target price of $41.00, suggesting a potential downside of 0.10%. Preferred Bank has a consensus target price of $104.67, suggesting a potential upside of 14.29%. Given Preferred Bank’s stronger consensus rating and higher possible upside, analysts clearly believe Preferred Bank is more favorable than FS Bancorp.

Volatility & Risk

FS Bancorp has a beta of 0.78, meaning that its share price is 22% less volatile than the S&P 500. Comparatively, Preferred Bank has a beta of 0.73, meaning that its share price is 27% less volatile than the S&P 500.

Earnings and Valuation

This table compares FS Bancorp and Preferred Bank”s revenue, earnings per share and valuation.

	Gross Revenue	Price/Sales Ratio	Net Income	Earnings Per Share	Price/Earnings Ratio
FS Bancorp	$206.39 million	1.51	$35.02 million	$4.10	10.01
Preferred Bank	$280.18 million	4.72	$130.66 million	$9.84	9.31

Preferred Bank has higher revenue and earnings than FS Bancorp. Preferred Bank is trading at a lower price-to-earnings ratio than FS Bancorp, indicating that it is currently the more affordable of the two stocks.

Institutional & Insider Ownership

63.9% of FS Bancorp shares are held by institutional investors. Comparatively, 72.8% of Preferred Bank shares are held by institutional investors. 12.7% of FS Bancorp shares are held by company insiders. Strong institutional ownership is an indication that endowments, large money managers and hedge funds believe a stock will outperform the market over the long term.

Profitability

This table compares FS Bancorp and Preferred Bank’s net margins, return on equity and return on assets.

	Net Margins	Return on Equity	Return on Assets
FS Bancorp	15.10%	10.87%	1.05%
Preferred Bank	25.67%	16.91%	1.82%

Summary

Preferred Bank beats FS Bancorp on 13 of the 18 factors compared between the two stocks.

About FS Bancorp

FS Bancorp, Inc. operates as a bank holding company for 1st Security Bank of Washington that provides banking and financial services to local families, local and regional businesses, and industry niches. The company operates in two segments, Commercial and Consumer Banking; and Home Lending. It offers various deposit instruments, including checking accounts, money market deposit accounts, savings accounts, and certificates of deposit. The company provides one-to-four-family residential first mortgages, second mortgage/home equity loan products, non-mortgage commercial business loans, commercial real estate loans, and construction and development loans, as well as consumer loans, which primarily include personal lines of credit, credit cards, automobile, direct home improvement, loans on deposit, and recreational loans. It operates full bank service branches and home loan production offices in suburban communities in the greater Puget Sound area, including Snohomish, King, Pierce, Jefferson, Kitsap, Clallam, Grays Harbor, and Thurston counties; and a loan production office in the market area of the Tri-Cities. FS Bancorp, Inc. was founded in 1936 and is headquartered in Mountlake Terrace, Washington.

About Preferred Bank

Preferred Bank provides various commercial banking products and services to small and mid-sized businesses and their owners, entrepreneurs, real estate developers and investors, professionals, and high net worth individuals. The company accepts checking, savings, and money market deposit accounts; fixed-rate and fixed maturity retail, and non-retail certificates of deposit; and individual retirement accounts. It also provides real estate mortgage loans that are secured by retail, industrial, office, special purpose, and residential single and multi-family properties; real estate construction loans; commercial loans comprising lines of credit for working capital, term loans for capital expenditures, and commercial and stand-by letters of credit; and small business administration loans. In addition, the company offers trade finance services, including commercial and export letters of credit, import lines of credit, documentary collections, international wire transfers, acceptances/trust receipt financing products, export financing, and bills purchase programs. Further, it provides cash management services; and internet, mobile, and tablet banking services. The company operates through full-service branch offices in the California counties of Los Angeles, Orange and San Francisco; Flushing, New York; Houston suburb of Sugar Land, Texas; and a satellite office in Manhattan, New York. The company was incorporated in 1991 and is headquartered in Los Angeles, California.