Summit Hotel Properties, Inc. (NYSE:INN) and LGI Homes, Inc. (NASDAQ:LGIH) are the two most active stocks in the Real Estate Development 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.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. Summit Hotel Properties, Inc. (INN) has an EBITDA margin of 43.48%, compared to an EBITDA margin of 14.08% for LGI Homes, Inc. (LGIH). This suggests that INN underlying business is more profitable. INN’s ROI is 5.00% while LGIH has a ROI of 9.60%. The interpretation is that LGIH’s business generates a higher return on investment than INN’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. INN’s free cash flow (“FCF”) per share for the trailing twelve months was +0.12. Comparatively, LGIH’s free cash flow per share was -0.89. On a percent-of-sales basis, INN’s free cash flow was 0% while LGIH converted -0% of its revenues into cash flow. This means that, for a given level of sales, INN is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. INN’s debt-to-equity ratio is 0.61 versus a D/E of 1.09 for LGIH. LGIH is therefore the more solvent of the two companies, and has lower financial risk.
INN trades at a forward P/E of 27.11, a P/B of 1.23, and a P/S of 3.27, compared to a forward P/E of 9.58, a P/B of 2.47, and a P/S of 1.18 for LGIH. INN 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
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. INN is currently priced at a -15.12% to its one-year price target of $17.79. Comparatively, LGIH is -4.51% relative to its price target of $48.75. This suggests that INN 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 1.80 for INN and 2.70 for LGIH, which implies that analysts are more bullish on the outlook for LGIH.
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. INN has a beta of 1.20 and LGIH’s beta is 0.06. LGIH’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. INN has a short ratio of 2.60 compared to a short interest of 16.61 for LGIH. This implies that the market is currently less bearish on the outlook for INN.
Summit Hotel Properties, Inc. (NYSE:INN) beats LGI Homes, Inc. (NASDAQ:LGIH) on a total of 7 of the 12 factors compared between the two stocks. INN is more profitable, has higher cash flow per share and has lower financial risk. INN is more undervalued relative to its price target. Finally, INN has better sentiment signals based on short interest.