Chesapeake Lodging Trust (NYSE:CHSP) and Hersha Hospitality Trust (NYSE:HT) are the two most active stocks in the REIT – Hotel/Motel 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 increase earnings at a high compound rate over time are attractive to investors. Analysts expect CHSP to grow earnings at a 8.00% annual rate over the next 5 years. Comparatively, HT is expected to grow at a 27.80% annual rate. All else equal, HT’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. Chesapeake Lodging Trust (CHSP) has an EBITDA margin of 14.58%, compared to an EBITDA margin of 51.08% for Hersha Hospitality Trust (HT). This suggests that HT underlying business is more profitable. CHSP’s ROI is 5.60% while HT has a ROI of 3.70%. The interpretation is that CHSP’s business generates a higher return on investment than HT’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. CHSP’s free cash flow (“FCF”) per share for the trailing twelve months was +0.01. Comparatively, HT’s free cash flow per share was +0.46. On a percent-of-sales basis, CHSP’s free cash flow was 0% while HT converted 0% of its revenues into cash flow. This means that, for a given level of sales, CHSP 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. CHSP’s debt-to-equity ratio is 0.66 versus a D/E of 1.18 for HT. HT is therefore the more solvent of the two companies, and has lower financial risk.
CHSP trades at a forward P/E of 22.10, a P/B of 1.26, and a P/S of 2.49, compared to a forward P/E of 196.88, a P/B of 0.85, and a P/S of 1.61 for HT. CHSP is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B 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
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. CHSP is currently priced at a 5.67% to its one-year price target of $23.63. Comparatively, HT is -6.1% relative to its price target of $19.50. This suggests that HT 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 2.70 for CHSP and 2.70 for HT, which implies that analysts are equally bullish on their outlook for the two stocks.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. CHSP has a beta of 1.14 and HT’s beta is 1.39. CHSP’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. CHSP has a short ratio of 6.61 compared to a short interest of 11.35 for HT. This implies that the market is currently less bearish on the outlook for CHSP.
Hersha Hospitality Trust (NYSE:HT) beats Chesapeake Lodging Trust (NYSE:CHSP) on a total of 6 of the 13 factors compared between the two stocks. HT generates a higher return on investment, is more profitable and has higher cash flow per share. In terms of valuation, HT is the cheaper of the two stocks on book value and sales basis, HT is more undervalued relative to its price target. Finally, CTRE has better sentiment signals based on short interest.