RLJ Lodging Trust (NYSE:RLJ) shares are down more than -1.41% this year and recently decreased -0.18% or -$0.04 to settle at $21.66. DiamondRock Hospitality Company (NYSE:DRH), on the other hand, is down -1.51% year to date as of 02/12/2018. It currently trades at $11.12 and has returned 0.18% during the past week.
RLJ Lodging Trust (NYSE:RLJ) and DiamondRock Hospitality Company (NYSE:DRH) 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.
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 RLJ to grow earnings at a -1.13% annual rate over the next 5 years. Comparatively, DRH is expected to grow at a -9.50% annual rate. All else equal, RLJ’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 13.67% for DiamondRock Hospitality Company (DRH). RLJ’s ROI is 5.60% while DRH has a ROI of 5.30%. The interpretation is that RLJ’s business generates a higher return on investment than DRH’s.
The value of a stock is simply the present value of its future free cash flows. RLJ’s free cash flow (“FCF”) per share for the trailing twelve months was -0.16. Comparatively, DRH’s free cash flow per share was +0.11. On a percent-of-sales basis, RLJ’s free cash flow was -2.41% while DRH converted 0% of its revenues into cash flow. This means that, for a given level of sales, DRH is able to generate more free cash flow for investors.
RLJ’s debt-to-equity ratio is 0.91 versus a D/E of 0.51 for DRH. RLJ is therefore the more solvent of the two companies, and has lower financial risk.
RLJ trades at a forward P/E of 23.22, a P/B of 0.95, and a P/S of 3.09, compared to a forward P/E of 24.33, a P/B of 1.22, and a P/S of 2.57 for DRH. 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”. RLJ is currently priced at a -8.03% to its one-year price target of 23.55. Comparatively, DRH is -5.36% relative to its price target of 11.75. This suggests that RLJ 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 RLJ and 2.60 for DRH, which implies that analysts are more bullish on the outlook for DRH.
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 1.14 and DRH’s beta is 1.28. RLJ’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. RLJ has a short ratio of 3.85 compared to a short interest of 5.23 for DRH. This implies that the market is currently less bearish on the outlook for RLJ.
RLJ Lodging Trust (NYSE:RLJ) beats DiamondRock Hospitality Company (NYSE:DRH) on a total of 10 of the 14 factors compared between the two stocks. RLJ is growing fastly, is more profitable, generates a higher return on investment and higher liquidity. In terms of valuation, RLJ is the cheaper of the two stocks on an earnings and book value, RLJ is more undervalued relative to its price target. Finally, RLJ has better sentiment signals based on short interest.