Anworth Mortgage Asset Corporation (NYSE:ANH) and Arbor Realty Trust, Inc. (NYSE:ABR) are the two most active stocks in the REIT – Diversified industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
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 ANH to grow earnings at a -3.85% annual rate over the next 5 years. Comparatively, ABR is expected to grow at a 8.00% annual rate. All else equal, ABR’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Anworth Mortgage Asset Corporation (ANH) has an EBITDA margin of 108.13%, compared to an EBITDA margin of 99.14% for Arbor Realty Trust, Inc. (ABR). This suggests that ANH underlying business is more profitable. ANH’s ROI is 0.50% while ABR has a ROI of 1.50%. The interpretation is that ABR’s business generates a higher return on investment than ANH’s.
Cash is king when it comes to investing. ANH’s free cash flow (“FCF”) per share for the trailing twelve months was +0.12. Comparatively, ABR’s free cash flow per share was +2.80. On a percent-of-sales basis, ANH’s free cash flow was 0.01% while ABR converted 0.08% of its revenues into cash flow. This means that, for a given level of sales, ABR is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. ANH’s debt-to-equity ratio is 6.65 versus a D/E of 3.38 for ABR. ANH is therefore the more solvent of the two companies, and has lower financial risk.
ANH trades at a forward P/E of 12.15, a P/B of 0.97, and a P/S of 4.17, compared to a forward P/E of 10.08, a P/B of 0.78, and a P/S of 1.90 for ABR. ANH is the expensive 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”. ANH is currently priced at a 0.67% to its one-year price target of $6.00. Comparatively, ABR is -11.23% relative to its price target of $9.08. This suggests that ABR 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 3.00 for ANH and 2.30 for ABR, which implies that analysts are more bullish on the outlook for ANH.
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. ANH has a beta of 0.31 and ABR’s beta is 0.62. ANH’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. ANH has a short ratio of 2.00 compared to a short interest of 2.09 for ABR. This implies that the market is currently less bearish on the outlook for ANH.
Arbor Realty Trust, Inc. (NYSE:ABR) beats Anworth Mortgage Asset Corporation (NYSE:ANH) on a total of 10 of the 13 factors compared between the two stocks. ABR is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, ABR is the cheaper of the two stocks on an earnings, book value and sales basis, ABR is more undervalued relative to its price target. Finally, IVR has better sentiment signals based on short interest.