Masco Corporation (NYSE:MAS) shares are down more than -3.35% this year and recently decreased -0.02% or -$0.01 to settle at $42.47. Equity Residential (NYSE:EQR), on the other hand, is down -6.70% year to date as of 03/12/2018. It currently trades at $59.50 and has returned 5.37% during the past week.
Masco Corporation (NYSE:MAS) and Equity Residential (NYSE:EQR) are the two most active stocks in the market based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
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 MAS to grow earnings at a 19.66% annual rate over the next 5 years. Comparatively, EQR is expected to grow at a 2.70% annual rate. All else equal, MAS’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 65.24% for Equity Residential (EQR). MAS’s ROI is 27.50% while EQR has a ROI of 4.40%. The interpretation is that MAS’s business generates a higher return on investment than EQR’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. MAS’s free cash flow (“FCF”) per share for the trailing twelve months was +0.61. Comparatively, EQR’s free cash flow per share was -. On a percent-of-sales basis, MAS’s free cash flow was 2.5% while EQR converted 0% of its revenues into cash flow. This means that, for a given level of sales, MAS is able to generate more free cash flow for investors.
MAS trades at a forward P/E of 14.58, and a P/S of 1.71, compared to a forward P/E of 43.40, a P/B of 2.14, and a P/S of 8.68 for EQR. MAS is the cheaper 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 isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. MAS is currently priced at a -11.63% to its one-year price target of 48.06. Comparatively, EQR is -10.03% relative to its price target of 66.13. This suggests that MAS 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 2.20 for MAS and 2.80 for EQR, which implies that analysts are more bullish on the outlook for EQR.
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. MAS has a beta of 1.51 and EQR’s beta is 0.47. EQR’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.MAS has a short ratio of 2.96 compared to a short interest of 3.39 for EQR. This implies that the market is currently less bearish on the outlook for MAS.
Masco Corporation (NYSE:MAS) beats Equity Residential (NYSE:EQR) on a total of 12 of the 14 factors compared between the two stocks. MAS is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, MAS is the cheaper of the two stocks on an earnings, book value and sales basis, MAS is more undervalued relative to its price target. Finally, MAS has better sentiment signals based on short interest.