Forestar Group Inc. (NYSE:FOR) and Marcus & Millichap, Inc. (NYSE:MMI) are the two most active stocks in the Real Estate Development 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect FOR to grow earnings at a 10.00% annual rate over the next 5 years. Comparatively, MMI is expected to grow at a 10.50% annual rate. All else equal, MMI’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. Forestar Group Inc. (FOR) has an EBITDA margin of 77.1%, compared to an EBITDA margin of 11.28% for Marcus & Millichap, Inc. (MMI). This suggests that FOR underlying business is more profitable. FOR’s ROI is 13.30% while MMI has a ROI of 23.80%. The interpretation is that MMI’s business generates a higher return on investment than FOR’s.
The value of a stock is simply the present value of its future free cash flows. FOR’s free cash flow (“FCF”) per share for the trailing twelve months was -0.21. Comparatively, MMI’s free cash flow per share was +0.91. On a percent-of-sales basis, FOR’s free cash flow was -0% while MMI converted 0% of its revenues into cash flow. This means that, for a given level of sales, FOR is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. FOR’s debt-to-equity ratio is 0.19 versus a D/E of 0.03 for MMI. FOR is therefore the more solvent of the two companies, and has lower financial risk.
FOR trades at a forward P/B of 1.24, and a P/S of 4.44, compared to a forward P/E of 15.73, a P/B of 3.48, and a P/S of 1.43 for MMI. FOR 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. FOR is currently priced at a -3.38% to its one-year price target of $17.75. Comparatively, MMI is -2.34% relative to its price target of $26.50. This suggests that FOR 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 FOR and 3.00 for MMI, which implies that analysts are equally bullish on their outlook for the two stocks.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. FOR has a beta of 1.88 and MMI’s beta is 1.54. MMI’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. FOR has a short ratio of 1.16 compared to a short interest of 8.34 for MMI. This implies that the market is currently less bearish on the outlook for FOR.
Marcus & Millichap, Inc. (NYSE:MMI) beats Forestar Group Inc. (NYSE:FOR) on a total of 6 of the 12 factors compared between the two stocks. MMI is more profitable, generates a higher return on investment, has higher cash flow per share and has lower financial risk. Finally, INN has better sentiment signals based on short interest.