VEREIT, Inc. (NYSE:VER) and Brandywine Realty Trust (NYSE:BDN) 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.
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 VER to grow earnings at a 5.00% annual rate over the next 5 years. Comparatively, BDN is expected to grow at a 5.00% annual rate. All else equal, All else equal, the two stocks’ identical expected growth rates would imply a similar 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. VEREIT, Inc. (VER) has an EBITDA margin of 19.58%, compared to an EBITDA margin of 55.82% for Brandywine Realty Trust (BDN). This suggests that BDN underlying business is more profitable. VER’s ROI is 0.40% while BDN has a ROI of -0.20%. The interpretation is that VER’s business generates a higher return on investment than BDN’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. VER’s free cash flow (“FCF”) per share for the trailing twelve months was +0.05. Comparatively, BDN’s free cash flow per share was -0.11. On a percent-of-sales basis, VER’s free cash flow was 3.36% while BDN converted -0% of its revenues into cash flow. This means that, for a given level of sales, VER 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. VER’s debt-to-equity ratio is 0.74 versus a D/E of 1.10 for BDN. BDN is therefore the more solvent of the two companies, and has lower financial risk.
VER trades at a forward P/B of 0.99, and a P/S of 5.83, compared to a forward P/E of 71.32, a P/B of 1.80, and a P/S of 6.03 for BDN. 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. VER is currently priced at a -11.55% to its one-year price target of $9.44. Comparatively, BDN is -2.46% relative to its price target of $18.28. This suggests that VER 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 2.50 for VER and 2.50 for BDN, which implies that analysts are equally bullish on their outlook for the two stocks.
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. VER has a beta of 0.72 and BDN’s beta is 1.04. VER’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. VER has a short ratio of 2.82 compared to a short interest of 3.81 for BDN. This implies that the market is currently less bearish on the outlook for VER.
VEREIT, Inc. (NYSE:VER) beats Brandywine Realty Trust (NYSE:BDN) on a total of 9 of the 12 factors compared between the two stocks. VER generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, VER is the cheaper of the two stocks on book value and sales basis, VER is more undervalued relative to its price target. Finally, VER has better sentiment signals based on short interest.