Realty Income Corporation (NYSE:O) and The Macerich Company (NYSE:MAC) are the two most active stocks in the REIT – Retail industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

**Growth**

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect O to grow earnings at a 7.80% annual rate over the next 5 years. Comparatively, MAC is expected to grow at a -0.11% annual rate. All else equal, O’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. Realty Income Corporation (O) has an EBITDA margin of 90.52%, compared to an EBITDA margin of 66.4% for The Macerich Company (MAC). This suggests that O underlying business is more profitable. O’s ROI is 2.40% while MAC has a ROI of 1.10%. The interpretation is that O’s business generates a higher return on investment than MAC’s.

**Cash Flow **

The value of a stock is simply the present value of its future free cash flows. O’s free cash flow (“FCF”) per share for the trailing twelve months was +0.25. Comparatively, MAC’s free cash flow per share was +0.02. On a percent-of-sales basis, O’s free cash flow was 6.22% while MAC converted 0.27% of its revenues into cash flow. This means that, for a given level of sales, O is able to generate more free cash flow for investors.

**Liquidity and Financial Risk**

O’s debt-to-equity ratio is 0.86 versus a D/E of 1.29 for MAC. MAC is therefore the more solvent of the two companies, and has lower financial risk.

**Valuation**

O trades at a forward P/E of 46.90, a P/B of 2.27, and a P/S of 13.63, compared to a forward P/E of 61.38, a P/B of 1.94, and a P/S of 7.37 for MAC. O 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**

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. O is currently priced at a -3.17% to its one-year price target of $60.25. Comparatively, MAC is -15.92% relative to its price target of $63.00. This suggests that MAC 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 2.80 for O and 2.80 for MAC, which implies that analysts are equally bullish on their outlook for the two stocks.

**Risk and Volatility**

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. O has a beta of 0.34 and MAC’s beta is 0.78. O’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. O has a short ratio of 13.16 compared to a short interest of 7.97 for MAC. This implies that the market is currently less bearish on the outlook for MAC.

**Summary**

Realty Income Corporation (NYSE:O) beats The Macerich Company (NYSE:MAC) on a total of 8 of the 13 factors compared between the two stocks. O is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk.Finally, RPAI has better sentiment signals based on short interest.