Lexington Realty Trust (NYSE:LXP) shares are down more than -13.68% this year and recently increased 0.73% or $0.06 to settle at $8.33. New Senior Investment Group Inc. (NYSE:SNR), on the other hand, is down -6.08% year to date as of 02/12/2018. It currently trades at $7.10 and has returned -1.39% during the past week.
Lexington Realty Trust (NYSE:LXP) and New Senior Investment Group Inc. (NYSE:SNR) are the two most active stocks in the REIT – Diversified 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.
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 LXP to grow earnings at a 5.00% annual rate over the next 5 years.
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 49.04% for New Senior Investment Group Inc. (SNR). LXP’s ROI is 2.60% while SNR has a ROI of -3.10%. The interpretation is that LXP’s business generates a higher return on investment than SNR’s.
The value of a stock is simply the present value of its future free cash flows. LXP’s free cash flow (“FCF”) per share for the trailing twelve months was +0.08. Comparatively, SNR’s free cash flow per share was -0.06. On a percent-of-sales basis, LXP’s free cash flow was 0% while SNR converted -0% of its revenues into cash flow. This means that, for a given level of sales, LXP is able to generate more free cash flow for investors.
Liquidity and Financial Risk
LXP’s debt-to-equity ratio is 1.67 versus a D/E of 4.23 for SNR. SNR is therefore the more solvent of the two companies, and has lower financial risk.
LXP trades at a forward P/E of 32.41, a P/B of 1.59, and a P/S of 5.02, compared to a P/B of 1.18, and a P/S of 1.28 for SNR. LXP is the expensive 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
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. LXP is currently priced at a -18.01% to its one-year price target of 10.16. Comparatively, SNR is -21.11% relative to its price target of 9.00. This suggests that SNR 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 3.20 for LXP and 3.30 for SNR, which implies that analysts are more bullish on the outlook for SNR.
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. LXP has a beta of 0.91 and SNR’s beta is 0.76. SNR’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. LXP has a short ratio of 2.62 compared to a short interest of 2.88 for SNR. This implies that the market is currently less bearish on the outlook for LXP.
Lexington Realty Trust (NYSE:LXP) beats New Senior Investment Group Inc. (NYSE:SNR) on a total of 7 of the 14 factors compared between the two stocks. LXP is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share and has lower financial risk. Finally, LXP has better sentiment signals based on short interest.