Kimco Realty Corporation (NYSE:KIM) shares are down more than -23.37% this year and recently decreased -0.72% or -$0.14 to settle at $19.28. Realty Income Corporation (NYSE:O), on the other hand, is down -1.27% year to date as of 10/12/2017. It currently trades at $56.75 and has returned -0.49% during the past week.
Kimco Realty Corporation (NYSE:KIM) and Realty Income Corporation (NYSE:O) are the two most active stocks in the REIT – Retail industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect KIM to grow earnings at a 5.53% annual rate over the next 5 years. Comparatively, O is expected to grow at a 7.80% annual rate. All else equal, O’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 90.52% for Realty Income Corporation (O). KIM’s ROI is 1.80% while O has a ROI of 2.40%. The interpretation is that O’s business generates a higher return on investment than KIM’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. KIM’s free cash flow (“FCF”) per share for the trailing twelve months was -0.19. Comparatively, O’s free cash flow per share was +0.25. On a percent-of-sales basis, KIM’s free cash flow was -6.91% while O converted 6.22% 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.
KIM’s debt-to-equity ratio is 1.03 versus a D/E of 0.86 for O. KIM is therefore the more solvent of the two companies, and has lower financial risk.
KIM trades at a forward P/E of 33.88, a P/B of 1.56, and a P/S of 6.97, compared to a forward P/E of 45.62, a P/B of 2.21, and a P/S of 13.40 for O. KIM is the cheaper 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. KIM is currently priced at a -15.03% to its one-year price target of 22.69. Comparatively, O is -5.81% relative to its price target of 60.25. This suggests that KIM 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 2.50 for KIM and 2.80 for O, which implies that analysts are more bullish on the outlook for O.
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. KIM has a beta of 0.67 and O’s beta is 0.31. O’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. KIM has a short ratio of 5.58 compared to a short interest of 13.27 for O. This implies that the market is currently less bearish on the outlook for KIM.
Realty Income Corporation (NYSE:O) beats Kimco Realty Corporation (NYSE:KIM) on a total of 7 of the 14 factors compared between the two stocks. O higher liquidity, 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. In terms of valuation, KIM is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, NRZ has better sentiment signals based on short interest.