Brixmor Property Group Inc. (NYSE:BRX) and Retail Properties of America, Inc. (NYSE:RPAI) are the two most active stocks in the REIT – Retail 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.
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 as measures of profitability. Brixmor Property Group Inc. (BRX) has an EBITDA margin of 69.14%, compared to an EBITDA margin of 59.14% for Retail Properties of America, Inc. (RPAI). This suggests that BRX underlying business is more profitable.
If there’s one thing investors care more about than earnings, it’s cash flow. BRX’s free cash flow (“FCF”) per share for the trailing twelve months was +0.19. Comparatively, RPAI’s free cash flow per share was +0.03. On a percent-of-sales basis, BRX’s free cash flow was 4.55% while RPAI converted 0% of its revenues into cash flow. This means that, for a given level of sales, BRX 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. BRX’s debt-to-equity ratio is 2.00 versus a D/E of 0.89 for RPAI. BRX is therefore the more solvent of the two companies, and has lower financial risk.
BRX trades at a forward P/E of 22.21, a P/B of 1.97, and a P/S of 4.54, compared to a forward P/E of 64.22, a P/B of 1.47, and a P/S of 5.39 for RPAI. 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 is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. BRX is currently priced at a -15.79% to its one-year price target of $22.42. Comparatively, RPAI is -19.13% relative to its price target of $16.36. This suggests that RPAI 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 2.30 for BRX and 2.30 for RPAI, 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. BRX has a beta of 0.56 and RPAI’s beta is 0.47. RPAI’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. BRX has a short ratio of 1.57 compared to a short interest of 1.16 for RPAI. This implies that the market is currently less bearish on the outlook for RPAI.
Retail Properties of America, Inc. (NYSE:RPAI) beats Brixmor Property Group Inc. (NYSE:BRX) on a total of 5 of the 11 factors compared between the two stocks. RPAI is more profitable. RPAI is more undervalued relative to its price target. Finally, RPAI has better sentiment signals based on short interest.