Ventas, Inc. (NYSE:VTR) shares are down more than -8.52% this year and recently increased 0.99% or $0.54 to settle at $54.90. American Electric Power Company, Inc. (NYSE:AEP), on the other hand, is down -1.18% year to date as of 10/10/2018. It currently trades at $72.70 and has returned 3.53% during the past week.
Ventas, Inc. (NYSE:VTR) and American Electric Power Company, Inc. (NYSE:AEP) are the two most active stocks in the REIT – Healthcare Facilities 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.Growth
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect VTR to grow earnings at a 6.90% annual rate over the next 5 years. Comparatively, AEP is expected to grow at a 5.59% annual rate. All else equal, VTR’s higher growth rate would imply a greater 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., compared to an EBITDA margin of 23.12% for American Electric Power Company, Inc. (AEP). VTR’s ROI is 4.80% while AEP has a ROI of 6.30%. The interpretation is that AEP’s business generates a higher return on investment than VTR’s.Cash Flow
Earnings don’t always accurately reflect the amount of cash that a company brings in. VTR’s free cash flow (“FCF”) per share for the trailing twelve months was +0.06. Comparatively, AEP’s free cash flow per share was -0.85. On a percent-of-sales basis, VTR’s free cash flow was 0.6% while AEP converted -2.72% of its revenues into cash flow. This means that, for a given level of sales, VTR is able to generate more free cash flow for investors.Liquidity and Financial Risk
VTR’s debt-to-equity ratio is 0.97 versus a D/E of 1.31 for AEP. AEP is therefore the more solvent of the two companies, and has lower financial risk.
VTR trades at a forward P/E of 34.97, a P/B of 1.82, and a P/S of 5.30, compared to a forward P/E of 17.61, a P/B of 1.91, and a P/S of 2.20 for AEP. VTR 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. VTR is currently priced at a -1.86% to its one-year price target of 55.94. Comparatively, AEP is -4.49% relative to its price target of 76.12. This suggests that AEP is the better investment over the next year.
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. VTR has a beta of 0.16 and AEP’s beta is 0.03. AEP’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. VTR has a short ratio of 3.94 compared to a short interest of 2.73 for AEP. This implies that the market is currently less bearish on the outlook for AEP.Summary
American Electric Power Company, Inc. (NYSE:AEP) beats Ventas, Inc. (NYSE:VTR) on a total of 8 of the 14 factors compared between the two stocks. AEP is growing fastly and higher liquidity. In terms of valuation, AEP is the cheaper of the two stocks on an earnings and sales basis, AEP is more undervalued relative to its price target. Finally, AEP has better sentiment signals based on short interest.