Prologis, Inc. (NYSE:PLD) shares are down more than -6.76% this year and recently decreased -0.28% or -$0.17 to settle at $60.15. Extra Space Storage Inc. (NYSE:EXR), on the other hand, is down -7.60% year to date as of 02/12/2018. It currently trades at $80.80 and has returned 1.16% during the past week.
Prologis, Inc. (NYSE:PLD) and Extra Space Storage Inc. (NYSE:EXR) are the two most active stocks in the REIT – Industrial 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.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect PLD to grow earnings at a -6.05% annual rate over the next 5 years. Comparatively, EXR is expected to grow at a 6.00% annual rate. All else equal, EXR’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. 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 59.8% for Extra Space Storage Inc. (EXR). PLD’s ROI is 2.40% while EXR has a ROI of 6.60%. The interpretation is that EXR’s business generates a higher return on investment than PLD’s.
Cash is king when it comes to investing. On a percent-of-sales basis, PLD’s free cash flow was 0% while EXR converted 0.01% of its revenues into cash flow. This means that, for a given level of sales, EXR is able to generate more free cash flow for investors.
PLD’s debt-to-equity ratio is 0.63 versus a D/E of 1.95 for EXR. EXR is therefore the more solvent of the two companies, and has lower financial risk.
PLD trades at a forward P/E of 38.48, a P/B of 2.07, and a P/S of 12.21, compared to a forward P/E of 28.11, a P/B of 4.59, and a P/S of 9.37 for EXR. PLD is the cheaper of the two stocks on book value basis but is expensive in terms of P/E 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
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. PLD is currently priced at a -12.75% to its one-year price target of 68.94. Comparatively, EXR is -8.05% relative to its price target of 87.87. This suggests that PLD 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 2.10 for PLD and 2.60 for EXR, which implies that analysts are more bullish on the outlook for EXR.
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. PLD has a beta of 0.92 and EXR’s beta is 0.39. EXR’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. PLD has a short ratio of 3.07 compared to a short interest of 12.81 for EXR. This implies that the market is currently less bearish on the outlook for PLD.
Extra Space Storage Inc. (NYSE:EXR) beats Prologis, Inc. (NYSE:PLD) on a total of 7 of the 14 factors compared between the two stocks. EXR is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, EXR is the cheaper of the two stocks on an earnings and sales basis,