Realty Income Corporation (NYSE:O) and Tanger Factory Outlet Centers, Inc. (NYSE:SKT) are the two most active stocks in the REIT – Retail 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 grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect O to grow earnings at a 7.80% annual rate over the next 5 years. Comparatively, SKT is expected to grow at a 6.70% annual rate. All else equal, O’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. Realty Income Corporation (O) has an EBITDA margin of 90.52%, compared to an EBITDA margin of 70.13% for Tanger Factory Outlet Centers, Inc. (SKT). This suggests that O underlying business is more profitable. O’s ROI is 2.40% while SKT has a ROI of 6.40%. The interpretation is that SKT’s business generates a higher return on investment than O’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. O’s free cash flow (“FCF”) per share for the trailing twelve months was +0.25. Comparatively, SKT’s free cash flow per share was -0.68. On a percent-of-sales basis, O’s free cash flow was 6.22% while SKT converted -0.01% of its revenues into cash flow. This means that, for a given level of sales, O is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. O’s debt-to-equity ratio is 0.86 versus a D/E of 2.75 for SKT. SKT is therefore the more solvent of the two companies, and has lower financial risk.
O trades at a forward P/E of 45.84, a P/B of 2.22, and a P/S of 13.59, compared to a forward P/E of 23.66, a P/B of 3.78, and a P/S of 5.00 for SKT. O 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
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. O is currently priced at a -5.34% to its one-year price target of $60.25. Comparatively, SKT is -8.25% relative to its price target of $27.26. This suggests that SKT 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 O and 3.00 for SKT, which implies that analysts are more bullish on the outlook for SKT.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. O has a beta of 0.34 and SKT’s beta is 0.50. O’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. O has a short ratio of 13.39 compared to a short interest of 11.57 for SKT. This implies that the market is currently less bearish on the outlook for SKT.
Realty Income Corporation (NYSE:O) beats Tanger Factory Outlet Centers, Inc. (NYSE:SKT) on a total of 8 of the 13 factors compared between the two stocks. O is growing fastly, is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. Finally, BRX has better sentiment signals based on short interest.