RLJ Lodging Trust (NYSE:RLJ) shares are down more than -6.98% this year and recently increased 3.26% or $0.72 to settle at $22.78. Ashford Hospitality Prime, Inc. (NYSE:AHP), on the other hand, is down -25.35% year to date as of 12/15/2017. It currently trades at $10.19 and has returned 4.30% during the past week.
RLJ Lodging Trust (NYSE:RLJ) and Ashford Hospitality Prime, Inc. (NYSE:AHP) are the two most active stocks in the REIT – Hotel/Motel 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect RLJ to grow earnings at a 15.48% annual rate over the next 5 years. Comparatively, AHP is expected to grow at a 15.30% annual rate. All else equal, RLJ’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 23.09% for Ashford Hospitality Prime, Inc. (AHP). RLJ’s ROI is 5.60% while AHP has a ROI of 4.00%. The interpretation is that RLJ’s business generates a higher return on investment than AHP’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. RLJ’s free cash flow (“FCF”) per share for the trailing twelve months was -0.16. Comparatively, AHP’s free cash flow per share was -0.08. On a percent-of-sales basis, RLJ’s free cash flow was -2.41% while AHP converted -0% of its revenues into cash flow. This means that, for a given level of sales, AHP is able to generate more free cash flow for investors.
RLJ’s debt-to-equity ratio is 0.91 versus a D/E of 2.51 for AHP. AHP is therefore the more solvent of the two companies, and has lower financial risk.
RLJ trades at a forward P/E of 24.05, a P/B of 1.00, and a P/S of 3.35, compared to a forward P/E of 27.54, a P/B of 0.89, and a P/S of 0.76 for AHP. RLJ 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. RLJ is currently priced at a -3.27% to its one-year price target of 23.55. Comparatively, AHP is -16.27% relative to its price target of 12.17. This suggests that AHP 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 2.60 for RLJ and 2.00 for AHP, which implies that analysts are more bullish on the outlook for RLJ.
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. RLJ has a beta of 1.17 and AHP’s beta is 1.14. AHP’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. RLJ has a short ratio of 2.80 compared to a short interest of 1.51 for AHP. This implies that the market is currently less bearish on the outlook for AHP.
Ashford Hospitality Prime, Inc. (NYSE:AHP) beats RLJ Lodging Trust (NYSE:RLJ) on a total of 8 of the 14 factors compared between the two stocks. AHP is growing fastly and has a higher cash conversion rate. In terms of valuation, AHP is the cheaper of the two stocks on book value and sales basis, AHP is more undervalued relative to its price target. Finally, AHP has better sentiment signals based on short interest.