DiamondRock Hospitality Company (NYSE:DRH) shares are up more than 3.19% this year and recently decreased -2.02% or -$0.24 to settle at $11.65. Werner Enterprises, Inc. (NASDAQ:WERN), on the other hand, is down -5.82% year to date as of 05/15/2018. It currently trades at $36.40 and has returned 2.68% during the past week.
DiamondRock Hospitality Company (NYSE:DRH) and Werner Enterprises, Inc. (NASDAQ:WERN) 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.Growth
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect DRH to grow earnings at a -9.50% annual rate over the next 5 years. Comparatively, WERN is expected to grow at a 22.54% annual rate. All else equal, WERN’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 17.15% for Werner Enterprises, Inc. (WERN). DRH’s ROI is 4.50% while WERN has a ROI of 7.20%. The interpretation is that WERN’s business generates a higher return on investment than DRH’s.Cash Flow
Earnings don’t always accurately reflect the amount of cash that a company brings in. DRH’s free cash flow (“FCF”) per share for the trailing twelve months was -0.09. Comparatively, WERN’s free cash flow per share was +0.01. On a percent-of-sales basis, DRH’s free cash flow was -0% while WERN converted 0.03% of its revenues into cash flow. This means that, for a given level of sales, WERN is able to generate more free cash flow for investors.Liquidity and Financial Risk
DRH’s debt-to-equity ratio is 0.52 versus a D/E of 0.06 for WERN. DRH is therefore the more solvent of the two companies, and has lower financial risk.
DRH trades at a forward P/E of 22.84, a P/B of 1.29, and a P/S of 2.74, compared to a forward P/E of 15.71, a P/B of 2.17, and a P/S of 1.17 for WERN. DRH 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. DRH is currently priced at a 1.92% to its one-year price target of 11.43. Comparatively, WERN is -14.11% relative to its price target of 42.38. This suggests that WERN 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. DRH has a beta of 1.40 and WERN’s beta is 0.98. WERN’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. DRH has a short ratio of 4.24 compared to a short interest of 9.79 for WERN. This implies that the market is currently less bearish on the outlook for DRH.Summary
Werner Enterprises, Inc. (NASDAQ:WERN) beats DiamondRock Hospitality Company (NYSE:DRH) on a total of 11 of the 14 factors compared between the two stocks. WERN , 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, WERN is the cheaper of the two stocks on an earnings and sales basis, WERN is more undervalued relative to its price target.