Earnings

Choosing Between STORE Capital Corporation (STOR) and Starwood Waypoint Homes (SFR)

STORE Capital Corporation (NYSE:STOR) shares are up more than 5.91% this year and recently increased 0.85% or $0.22 to settle at $26.17. Starwood Waypoint Homes (NYSE:SFR), on the other hand, is up 31.86% year to date as of 11/10/2017. It currently trades at $37.99 and has returned 1.96% during the past week.

STORE Capital Corporation (NYSE:STOR) and Starwood Waypoint Homes (NYSE:SFR) are the two most active stocks in the REIT – Diversified industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect STOR to grow earnings at a 5.87% annual rate over the next 5 years. Comparatively, SFR is expected to grow at a 10.00% annual rate. All else equal, SFR’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. , compared to an EBITDA margin of 23.95% for Starwood Waypoint Homes (SFR). STOR’s ROI is 4.50% while SFR has a ROI of -1.10%. The interpretation is that STOR’s business generates a higher return on investment than SFR’s.

Cash Flow 




Earnings don’t always accurately reflect the amount of cash that a company brings in. STOR’s free cash flow (“FCF”) per share for the trailing twelve months was +0.17. Comparatively, SFR’s free cash flow per share was +0.30. On a percent-of-sales basis, STOR’s free cash flow was 0.01% while SFR converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, STOR is able to generate more free cash flow for investors.

Financial Risk

STOR’s debt-to-equity ratio is 0.77 versus a D/E of 1.18 for SFR. SFR is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

STOR trades at a forward P/E of 29.74, a P/B of 1.60, and a P/S of 11.43, compared to a forward P/E of 238.93, a P/B of 1.35, and a P/S of 7.70 for SFR. STOR is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B 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. STOR is currently priced at a -0.38% to its one-year price target of 26.27. Comparatively, SFR is -3.41% relative to its price target of 39.33. This suggests that SFR 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 2.10 for STOR and 1.90 for SFR, which implies that analysts are more bullish on the outlook for STOR.

Insider Activity and Investor Sentiment

Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. STOR has a short ratio of 4.63 compared to a short interest of 8.96 for SFR. This implies that the market is currently less bearish on the outlook for STOR.

Summary

STORE Capital Corporation (NYSE:STOR) beats Starwood Waypoint Homes (NYSE:SFR) on a total of 7 of the 14 factors compared between the two stocks. STOR is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. Finally, STOR has better sentiment signals based on short interest.

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