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Critical Comparison: Host Hotels & Resorts, Inc. (HST) vs. D.R. Horton, Inc. (DHI)

Host Hotels & Resorts, Inc. (NYSE:HST) shares are down more than -0.30% this year and recently decreased -1.79% or -$0.36 to settle at $19.79. D.R. Horton, Inc. (NYSE:DHI), on the other hand, is down -25.06% year to date as of 10/10/2018. It currently trades at $38.27 and has returned -7.74% during the past week.

Host Hotels & Resorts, Inc. (NYSE:HST) and D.R. Horton, Inc. (NYSE:DHI) are the two most active stocks in the REIT – Hotel/Motel 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.

Growth

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect HST to grow earnings at a 28.40% annual rate over the next 5 years. Comparatively, DHI is expected to grow at a 21.50% annual rate. All else equal, HST’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., compared to an EBITDA margin of 12.76% for D.R. Horton, Inc. (DHI). HST’s ROI is 5.50% while DHI has a ROI of 9.80%. The interpretation is that DHI’s business generates a higher return on investment than HST’s.

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. HST’s free cash flow (“FCF”) per share for the trailing twelve months was +0.23. Comparatively, DHI’s free cash flow per share was +0.85. On a percent-of-sales basis, HST’s free cash flow was 3.17% while DHI converted 2.27% 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.

Financial Risk

HST’s debt-to-equity ratio is 0.59 versus a D/E of 0.36 for DHI. HST is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

HST trades at a forward P/E of 25.63, a P/B of 2.05, and a P/S of 2.71, compared to a forward P/E of 8.24, a P/B of 1.68, and a P/S of 0.92 for DHI. HST is the expensive of the two stocks on an earnings, book value and sales basis. 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. HST is currently priced at a -8.63% to its one-year price target of 21.66. Comparatively, DHI is -28.32% relative to its price target of 53.39. This suggests that DHI is the better investment over the next year.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. HST has a beta of 1.28 and DHI’s beta is 1.14. DHI’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. HST has a short ratio of 4.84 compared to a short interest of 2.62 for DHI. This implies that the market is currently less bearish on the outlook for DHI.

Summary




D.R. Horton, Inc. (NYSE:DHI) beats Host Hotels & Resorts, Inc. (NYSE:HST) on a total of 10 of the 14 factors compared between the two stocks. DHI is growing fastly, has higher cash flow per share and has lower financial risk. In terms of valuation, DHI is the cheaper of the two stocks on an earnings, book value and sales basis, DHI is more undervalued relative to its price target. Finally, DHI has better sentiment signals based on short interest.

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