AGNC Investment Corp. (NASDAQ:AGNC) and Equity Residential (NYSE:EQR) are the two most active stocks in the REIT – Residential industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect AGNC to grow earnings at a 0.55% annual rate over the next 5 years. Comparatively, EQR is expected to grow at a 2.70% annual rate. All else equal, EQR’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 which control for differences in capital structure between the two companies, to measure profitability. AGNC Investment Corp. (AGNC) has an EBITDA margin of 84.42%, compared to an EBITDA margin of 50.09% for Equity Residential (EQR). This suggests that AGNC underlying business is more profitable.
Earnings don’t always accurately reflect the amount of cash that a company brings in. AGNC’s free cash flow (“FCF”) per share for the trailing twelve months was +0.28. Comparatively, EQR’s free cash flow per share was +0.06. On a percent-of-sales basis, AGNC’s free cash flow was 8.21% while EQR converted 0.91% of its revenues into cash flow. This means that, for a given level of sales, AGNC 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. AGNC’s debt-to-equity ratio is 5.33 versus a D/E of 0.87 for EQR. AGNC is therefore the more solvent of the two companies, and has lower financial risk.
AGNC trades at a forward P/E of 9.02, a P/B of 1.02, and a P/S of 3.76, compared to a forward P/E of 47.45, a P/B of 2.38, and a P/S of 10.06 for EQR. AGNC is the cheaper 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. AGNC is currently priced at a 8.78% to its one-year price target of $20.04. Comparatively, EQR is -2.03% relative to its price target of $67.95. This suggests that EQR 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 AGNC and 3.00 for EQR, which implies that analysts are equally bullish on their outlook for the two stocks.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. AGNC has a beta of 0.21 and EQR’s beta is 0.41. AGNC’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. AGNC has a short ratio of 4.46 compared to a short interest of 5.37 for EQR. This implies that the market is currently less bearish on the outlook for AGNC.
AGNC Investment Corp. (NASDAQ:AGNC) beats Equity Residential (NYSE:EQR) on a total of 8 of the 12 factors compared between the two stocks. AGNC is more profitable, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, AGNC is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, AGNC has better sentiment signals based on short interest.