Starwood Property Trust, Inc. (NYSE:STWD) and Lexington Realty Trust (NYSE:LXP) are the two most active stocks in the REIT – Diversified industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
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 STWD to grow earnings at a 3.80% annual rate over the next 5 years. Comparatively, LXP is expected to grow at a 5.00% annual rate. All else equal, LXP’s higher growth rate would imply a greater potential for capital appreciation.
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. Starwood Property Trust, Inc. (STWD) has an EBITDA margin of 94.8%, compared to an EBITDA margin of 75.71% for Lexington Realty Trust (LXP). This suggests that STWD underlying business is more profitable. STWD’s ROI is 1.10% while LXP has a ROI of 2.60%. The interpretation is that LXP’s business generates a higher return on investment than STWD’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. STWD’s free cash flow (“FCF”) per share for the trailing twelve months was -1.04. Comparatively, LXP’s free cash flow per share was +0.00. On a percent-of-sales basis, STWD’s free cash flow was -0.03% while LXP converted 0% of its revenues into cash flow. This means that, for a given level of sales, LXP 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. STWD’s debt-to-equity ratio is 1.50 versus a D/E of 1.42 for LXP. STWD is therefore the more solvent of the two companies, and has lower financial risk.
STWD trades at a forward P/E of 9.98, a P/B of 1.25, and a P/S of 7.09, compared to a forward P/E of 38.85, a P/B of 1.94, and a P/S of 6.31 for LXP. 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. STWD is currently priced at a -8.41% to its one-year price target of $23.79. Comparatively, LXP is 3.25% relative to its price target of $10.16. This suggests that STWD 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 2.30 for STWD and 3.10 for LXP, which implies that analysts are more bullish on the outlook for LXP.
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. STWD has a beta of 0.57 and LXP’s beta is 1.00. STWD’s shares are therefore the less volatile of the two stocks.
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. STWD has a short ratio of 9.20 compared to a short interest of 3.34 for LXP. This implies that the market is currently less bearish on the outlook for LXP.
Lexington Realty Trust (NYSE:LXP) beats Starwood Property Trust, Inc. (NYSE:STWD) on a total of 7 of the 13 factors compared between the two stocks. LXP 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. Finally, LXP has better sentiment signals based on short interest.