Rexford Industrial Realty, Inc. (NYSE:REXR) and Terreno Realty Corporation (NYSE:TRNO) are the two most active stocks in the REIT – Industrial industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
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 REXR to grow earnings at a 9.00% annual rate over the next 5 years. Comparatively, TRNO is expected to grow at a 10.00% annual rate. All else equal, TRNO’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. Rexford Industrial Realty, Inc. (REXR) has an EBITDA margin of 92.24%, compared to an EBITDA margin of 60.02% for Terreno Realty Corporation (TRNO). This suggests that REXR underlying business is more profitable. REXR’s ROI is 1.60% while TRNO has a ROI of 2.40%. The interpretation is that TRNO’s business generates a higher return on investment than REXR’s.
If there’s one thing investors care more about than earnings, it’s cash flow. REXR’s free cash flow (“FCF”) per share for the trailing twelve months was -0.15. Comparatively, TRNO’s free cash flow per share was +0.01. On a percent-of-sales basis, REXR’s free cash flow was -0.01% while TRNO converted 0% of its revenues into cash flow. This means that, for a given level of sales, TRNO 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. REXR’s debt-to-equity ratio is 0.58 versus a D/E of 0.42 for TRNO. REXR is therefore the more solvent of the two companies, and has lower financial risk.
REXR trades at a forward P/E of 159.04, a P/B of 1.97, and a P/S of 14.37, compared to a forward P/E of 68.23, a P/B of 1.96, and a P/S of 15.35 for TRNO. REXR is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B 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. REXR is currently priced at a 0.75% to its one-year price target of $28.10. Comparatively, TRNO is 3.74% relative to its price target of $34.20. This suggests that REXR 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 2.10 for REXR and 2.20 for TRNO, which implies that analysts are more bullish on the outlook for TRNO.
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. REXR has a beta of 0.82 and TRNO’s beta is 0.81. TRNO’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. REXR has a short ratio of 2.39 compared to a short interest of 2.18 for TRNO. This implies that the market is currently less bearish on the outlook for TRNO.
Terreno Realty Corporation (NYSE:TRNO) beats Rexford Industrial Realty, Inc. (NYSE:REXR) on a total of 9 of the 13 factors compared between the two stocks. TRNO 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, TRNO is the cheaper of the two stocks on an earnings and book value, Finally, TRNO has better sentiment signals based on short interest.