Realty Income Corporation (NYSE:O) shares are down more than -9.29% this year and recently decreased -2.01% or -$1.06 to settle at $51.72. Intuitive Surgical, Inc. (NASDAQ:ISRG), on the other hand, is up 25.18% year to date as of 05/15/2018. It currently trades at $456.83 and has returned -1.25% during the past week.
Realty Income Corporation (NYSE:O) and Intuitive Surgical, Inc. (NASDAQ:ISRG) are the two most active stocks in the REIT – Retail 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.Growth
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 O to grow earnings at a 5.00% annual rate over the next 5 years. Comparatively, ISRG is expected to grow at a 11.47% annual rate. All else equal, ISRG’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 38.28% for Intuitive Surgical, Inc. (ISRG). O’s ROI is 2.10% while ISRG has a ROI of 19.60%. The interpretation is that ISRG’s business generates a higher return on investment than O’s.Cash Flow
If there’s one thing investors care more about than earnings, it’s cash flow. O’s free cash flow (“FCF”) per share for the trailing twelve months was +0.07. Comparatively, ISRG’s free cash flow per share was +2.03. On a percent-of-sales basis, O’s free cash flow was 1.64% while ISRG converted 7.35% of its revenues into cash flow. This means that, for a given level of sales, ISRG is able to generate more free cash flow for investors.Liquidity and Financial Risk
O’s debt-to-equity ratio is 0.91 versus a D/E of 0.00 for ISRG. O is therefore the more solvent of the two companies, and has lower financial risk.
O trades at a forward P/E of 38.37, a P/B of 2.02, and a P/S of 11.87, compared to a forward P/E of 39.38, a P/B of 9.37, and a P/S of 15.60 for ISRG. O 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. O is currently priced at a -6.69% to its one-year price target of 55.43. Comparatively, ISRG is -4.56% relative to its price target of 478.67. This suggests that O is the better investment over the next year.
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. O has a beta of 0.23 and ISRG’s beta is 0.58. O’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. O has a short ratio of 12.15 compared to a short interest of 2.42 for ISRG. This implies that the market is currently less bearish on the outlook for ISRG.Summary
Intuitive Surgical, Inc. (NASDAQ:ISRG) beats Realty Income Corporation (NYSE:O) on a total of 8 of the 14 factors compared between the two stocks. ISRG is more profitable, 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, O is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, ISRG has better sentiment signals based on short interest.