Finance

A Side-by-side Analysis of Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI) and Seritage Growth Properties (SRG)

Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE:HASI) and Seritage Growth Properties (NYSE:SRG) are the two most active stocks in the REIT – Diversified industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

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. Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI) has an EBITDA margin of 123.3%, compared to an EBITDA margin of 33.5% for Seritage Growth Properties (SRG). This suggests that HASI underlying business is more profitable. HASI’s ROI is 1.00% while SRG has a ROI of -1.60%. The interpretation is that HASI’s business generates a higher return on investment than SRG’s.

Cash Flow 



Earnings don’t always accurately reflect the amount of cash that a company brings in. HASI’s free cash flow (“FCF”) per share for the trailing twelve months was +0.22. Comparatively, SRG’s free cash flow per share was -0.51. On a percent-of-sales basis, HASI’s free cash flow was 0.01% while SRG converted -0.01% of its revenues into cash flow. This means that, for a given level of sales, HASI is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. HASI’s debt-to-equity ratio is 1.99 versus a D/E of 1.63 for SRG. HASI is therefore the more solvent of the two companies, and has lower financial risk.




Valuation

HASI trades at a forward P/E of 16.55, a P/B of 1.85, and a P/S of 14.09, compared to a forward P/B of 1.92, and a P/S of 6.73 for SRG. HASI 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. HASI is currently priced at a -10.24% to its one-year price target of $26.86. Comparatively, SRG is 8.02% relative to its price target of $43.00. This suggests that HASI 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 1.70 for HASI and 3.50 for SRG, which implies that analysts are more bullish on the outlook for SRG.

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. HASI has a beta of 0.97.

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. HASI has a short ratio of 10.01 compared to a short interest of 28.09 for SRG. This implies that the market is currently less bearish on the outlook for HASI.

Summary

Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE:HASI) beats Seritage Growth Properties (NYSE:SRG) on a total of 8 of the 10 factors compared between the two stocks. HASI is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. HASI is more undervalued relative to its price target. Finally, HASI has better sentiment signals based on short interest.

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