Pennsylvania Real Estate Investment Trust (NYSE:PEI) and Simon Property Group, Inc. (NYSE:SPG) are the two most active stocks in the REIT – Retail 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.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect PEI to grow earnings at a 1.00% annual rate over the next 5 years. Comparatively, SPG is expected to grow at a 9.72% annual rate. All else equal, SPG’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 and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. Pennsylvania Real Estate Investment Trust (PEI) has an EBITDA margin of 26.1%, compared to an EBITDA margin of 52.47% for Simon Property Group, Inc. (SPG). This suggests that SPG underlying business is more profitable. PEI’s ROI is 0.70% while SPG has a ROI of 9.80%. The interpretation is that SPG’s business generates a higher return on investment than PEI’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. PEI’s free cash flow (“FCF”) per share for the trailing twelve months was -0.61. Comparatively, SPG’s free cash flow per share was +1.76. On a percent-of-sales basis, PEI’s free cash flow was -0.01% while SPG converted 10.36% of its revenues into cash flow. This means that, for a given level of sales, SPG 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. PEI’s debt-to-equity ratio is 2.57 versus a D/E of 6.36 for SPG. SPG is therefore the more solvent of the two companies, and has lower financial risk.
PEI trades at a forward P/E of 76.33, a P/B of 1.22, and a P/S of 2.06, compared to a forward P/E of 22.96, a P/B of 13.64, and a P/S of 9.16 for SPG. 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. PEI is currently priced at a -10.81% to its one-year price target of $12.58. Comparatively, SPG is -15.19% relative to its price target of $190.15. This suggests that SPG 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 PEI and 1.90 for SPG, which implies that analysts are more bullish on the outlook for PEI.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. PEI has a beta of 1.25 and SPG’s beta is 0.61. SPG’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. PEI has a short ratio of 10.37 compared to a short interest of 10.99 for SPG. This implies that the market is currently less bearish on the outlook for PEI.
Simon Property Group, Inc. (NYSE:SPG) beats Pennsylvania Real Estate Investment Trust (NYSE:PEI) on a total of 9 of the 13 factors compared between the two stocks. SPG has lower financial risk, is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. SPG is more undervalued relative to its price target. Finally, KIM has better sentiment signals based on short interest.