Host Hotels & Resorts, Inc. (NYSE:HST) shares are up more than 6.32% this year and recently increased 0.20% or $0.04 to settle at $20.03. RLJ Lodging Trust (NYSE:RLJ), on the other hand, is down -14.54% year to date as of 11/10/2017. It currently trades at $20.93 and has returned -3.50% during the past week.
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. 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 increase earnings at a high compound rate over time are attractive to investors. 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
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 29.1% for RLJ Lodging Trust (RLJ). 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.
Cash is king when it comes to investing. HST’s free cash flow (“FCF”) per share for the trailing twelve months was +0.05. Comparatively, RLJ’s free cash flow per share was -. On a percent-of-sales basis, HST’s free cash flow was 0.68% while RLJ converted 0% 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.
HST’s debt-to-equity ratio is 0.56 versus a D/E of 0.91 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 30.17, a P/B of 2.09, and a P/S of 2.76, compared to a forward P/E of 20.48, a P/B of 0.92, and a P/S of 3.27 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 0.5% to its one-year price target of 19.93. Comparatively, RLJ is -12.24% relative to its price target of 23.85. 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 2.60 for HST and 2.60 for RLJ, which implies that analysts are equally bullish on their outlook for the two stocks.
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. HST has a beta of 1.31 and RLJ’s beta is 1.18. RLJ’s shares are therefore the less volatile of the two stocks.
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. HST has a short ratio of 8.03 compared to a short interest of 2.06 for RLJ. This implies that the market is currently less bearish on the outlook for RLJ.
Host Hotels & Resorts, Inc. (NYSE:HST) beats RLJ Lodging Trust (NYSE:RLJ) on a total of 7 of the 14 factors compared between the two stocks. HST is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. Finally, UNIT has better sentiment signals based on short interest.