Host Hotels & Resorts, Inc. (NYSE:HST) and RLJ Lodging Trust (NYSE:RLJ) are the two most active stocks in the REIT – Hotel/Motel 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 HST to grow earnings at a 28.40% annual rate over the next 5 years. Comparatively, RLJ is expected to grow at a 15.48% annual rate. All else equal, HST’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Host Hotels & Resorts, Inc. (HST) has an EBITDA margin of 24.92%, compared to an EBITDA margin of 32.37% for RLJ Lodging Trust (RLJ). This suggests that RLJ underlying business is more profitable. HST’s ROI is 6.10% while RLJ has a ROI of 5.60%. The interpretation is that HST’s business generates a higher return on investment than RLJ’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. HST’s free cash flow (“FCF”) per share for the trailing twelve months was +0.26. Comparatively, RLJ’s free cash flow per share was +0.24. On a percent-of-sales basis, HST’s free cash flow was 3.54% while RLJ converted 2.58% of its revenues into cash flow. This means that, for a given level of sales, HST 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. HST’s debt-to-equity ratio is 0.56 versus a D/E of 0.72 for RLJ. RLJ is therefore the more solvent of the two companies, and has lower financial risk.
HST trades at a forward P/E of 27.76, a P/B of 1.91, and a P/S of 2.50, compared to a forward P/E of 19.27, a P/B of 1.23, and a P/S of 3.47 for RLJ. HST 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 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. HST is currently priced at a -5.23% to its one-year price target of $19.33. Comparatively, RLJ is -7.52% relative to its price target of $23.81. This suggests that RLJ 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 2.80 for HST and 2.50 for RLJ, which implies that analysts are more bullish on the outlook for HST.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. HST has a beta of 1.35 and RLJ’s beta is 1.19. RLJ’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. HST has a short ratio of 10.53 compared to a short interest of 2.01 for RLJ. This implies that the market is currently less bearish on the outlook for RLJ.
RLJ Lodging Trust (NYSE:RLJ) beats Host Hotels & Resorts, Inc. (NYSE:HST) on a total of 7 of the 13 factors compared between the two stocks. RLJ is growing fastly. In terms of valuation, RLJ is the cheaper of the two stocks on an earnings and book value, RLJ is more undervalued relative to its price target. Finally, RLJ has better sentiment signals based on short interest.