Host Hotels & Resorts, Inc. (NYSE:HST) shares are down more than -2.17% this year and recently decreased -0.51% or -$0.1 to settle at $19.42. Sunstone Hotel Investors, Inc. (NYSE:SHO), on the other hand, is down -4.42% year to date as of 02/12/2018. It currently trades at $15.80 and has returned 0.25% during the past week.
Host Hotels & Resorts, Inc. (NYSE:HST) and Sunstone Hotel Investors, Inc. (NYSE:SHO) are the two most active stocks in the REIT – Hotel/Motel industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect HST to grow earnings at a 28.40% annual rate over the next 5 years. Comparatively, SHO is expected to grow at a 19.90% annual rate. All else equal, HST’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 14.95% for Sunstone Hotel Investors, Inc. (SHO). HST’s ROI is 6.10% while SHO has a ROI of 5.30%. The interpretation is that HST’s business generates a higher return on investment than SHO’s.
The value of a stock is simply the present value of its future free cash flows. HST’s free cash flow (“FCF”) per share for the trailing twelve months was +0.05. Comparatively, SHO’s free cash flow per share was +0.19. On a percent-of-sales basis, HST’s free cash flow was 0.68% while SHO converted 3.6% of its revenues into cash flow. This means that, for a given level of sales, SHO is able to generate more free cash flow for investors.
Liquidity and Financial Risk
HST’s debt-to-equity ratio is 0.56 versus a D/E of 0.41 for SHO. HST is therefore the more solvent of the two companies, and has lower financial risk.
HST trades at a forward P/E of 28.52, a P/B of 2.03, and a P/S of 2.67, compared to a forward P/E of 31.10, a P/B of 1.44, and a P/S of 2.97 for SHO. 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. HST is currently priced at a -5.27% to its one-year price target of 20.50. Comparatively, SHO is -2.65% relative to its price target of 16.23. This suggests that HST 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 HST and 3.20 for SHO, which implies that analysts are more bullish on the outlook for SHO.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. HST has a beta of 1.25 and SHO’s beta is 1.08. SHO’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. HST has a short ratio of 5.90 compared to a short interest of 5.83 for SHO. This implies that the market is currently less bearish on the outlook for SHO.
Sunstone Hotel Investors, Inc. (NYSE:SHO) beats Host Hotels & Resorts, Inc. (NYSE:HST) on a total of 7 of the 14 factors compared between the two stocks. SHO is growing fastly, has a higher cash conversion rate, higher liquidity and has lower financial risk. Finally, SHO has better sentiment signals based on short interest.