Monmouth Real Estate Investment Corporation (NYSE:MNR) and National Storage Affiliates Trust (NYSE:NSA) are the two most active stocks in the REIT – Industrial industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect MNR to grow earnings at a 7.00% annual rate over the next 5 years. Comparatively, NSA is expected to grow at a 11.00% annual rate. All else equal, NSA’s higher growth rate would imply a greater potential for capital appreciation.
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. Monmouth Real Estate Investment Corporation (MNR) has an EBITDA margin of 71.19%, compared to an EBITDA margin of 27.98% for National Storage Affiliates Trust (NSA). This suggests that MNR underlying business is more profitable. MNR’s ROI is 4.50% while NSA has a ROI of 3.50%. The interpretation is that MNR’s business generates a higher return on investment than NSA’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. MNR’s free cash flow (“FCF”) per share for the trailing twelve months was +0.08. Comparatively, NSA’s free cash flow per share was +0.27. On a percent-of-sales basis, MNR’s free cash flow was 0.01% while NSA converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, MNR 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. MNR’s debt-to-equity ratio is 1.51 versus a D/E of 1.68 for NSA. NSA is therefore the more solvent of the two companies, and has lower financial risk.
MNR trades at a forward P/E of 33.76, a P/B of 2.47, and a P/S of 10.62, compared to a forward P/E of 26.84, a P/B of 1.69, and a P/S of 4.11 for NSA. MNR 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
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. MNR is currently priced at a -7.94% to its one-year price target of $16.50. Comparatively, NSA is -13.45% relative to its price target of $25.43. This suggests that NSA 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 1.00 for MNR and 2.30 for NSA, which implies that analysts are more bullish on the outlook for NSA.
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. MNR has a beta of 0.51.
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. MNR has a short ratio of 2.12 compared to a short interest of 4.47 for NSA. This implies that the market is currently less bearish on the outlook for MNR.
National Storage Affiliates Trust (NYSE:NSA) beats Monmouth Real Estate Investment Corporation (NYSE:MNR) on a total of 6 of the 12 factors compared between the two stocks. NSA is more profitable and has higher cash flow per share. In terms of valuation, NSA is the cheaper of the two stocks on an earnings, book value and sales basis, NSA is more undervalued relative to its price target. Finally, TRNO has better sentiment signals based on short interest.