Extended Stay America, Inc. (NYSE:STAY) shares are up more than 2.58% this year and recently increased 2.31% or $0.44 to settle at $19.49. Wyndham Worldwide Corporation (NYSE:WYN), on the other hand, is up 1.77% year to date as of 02/13/2018. It currently trades at $117.92 and has returned -1.54% during the past week.
Extended Stay America, Inc. (NYSE:STAY) and Wyndham Worldwide Corporation (NYSE:WYN) are the two most active stocks in the Lodging 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 STAY to grow earnings at a 1.94% annual rate over the next 5 years. Comparatively, WYN is expected to grow at a 12.94% annual rate. All else equal, WYN’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 21.23% for Wyndham Worldwide Corporation (WYN). STAY’s ROI is 8.80% while WYN has a ROI of 11.50%. The interpretation is that WYN’s business generates a higher return on investment than STAY’s.
The value of a stock is simply the present value of its future free cash flows. STAY’s free cash flow (“FCF”) per share for the trailing twelve months was +0.35. Comparatively, WYN’s free cash flow per share was -0.96. On a percent-of-sales basis, STAY’s free cash flow was 5.3% while WYN converted -1.74% of its revenues into cash flow. This means that, for a given level of sales, STAY is able to generate more free cash flow for investors.
Liquidity and Financial Risk
STAY’s debt-to-equity ratio is 2.98 versus a D/E of 9.46 for WYN. WYN is therefore the more solvent of the two companies, and has lower financial risk.
STAY trades at a forward P/E of 17.96, a P/B of 4.39, and a P/S of 2.94, compared to a forward P/E of 16.61, a P/B of 19.36, and a P/S of 2.05 for WYN. STAY 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
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”. STAY is currently priced at a -7.37% to its one-year price target of 21.04. Comparatively, WYN is 4.59% relative to its price target of 112.75. This suggests that STAY 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 STAY and 2.60 for WYN, which implies that analysts are more bullish on the outlook for WYN.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. STAY has a beta of 0.96 and WYN’s beta is 1.30. STAY’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.STAY has a short ratio of 1.79 compared to a short interest of 4.37 for WYN. This implies that the market is currently less bearish on the outlook for STAY.
Extended Stay America, Inc. (NYSE:STAY) beats Wyndham Worldwide Corporation (NYSE:WYN) on a total of 9 of the 14 factors compared between the two stocks. STAY is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. STAY is more undervalued relative to its price target. Finally, STAY has better sentiment signals based on short interest.