Prologis, Inc. (NYSE:PLD) shares are down more than -0.43% this year and recently decreased -1.95% or -$1.28 to settle at $64.23. Legg Mason, Inc. (NYSE:LM), on the other hand, is down -15.65% year to date as of 06/13/2018. It currently trades at $35.41 and has returned -5.65% during the past week.
Prologis, Inc. (NYSE:PLD) and Legg Mason, Inc. (NYSE:LM) 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.Growth
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect PLD to grow earnings at a -6.05% annual rate over the next 5 years. Comparatively, LM is expected to grow at a 12.45% annual rate. All else equal, LM’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 11.2% for Legg Mason, Inc. (LM). PLD’s ROI is 2.60% while LM has a ROI of 3.40%. The interpretation is that LM’s business generates a higher return on investment than PLD’s.Cash Flow
The value of a stock is simply the present value of its future free cash flows. PLD’s free cash flow (“FCF”) per share for the trailing twelve months was +0.10. Comparatively, LM’s free cash flow per share was +1.82. On a percent-of-sales basis, PLD’s free cash flow was 2.04% while LM converted 4.95% of its revenues into cash flow. This means that, for a given level of sales, LM is able to generate more free cash flow for investors.Liquidity and Financial Risk
PLD’s debt-to-equity ratio is 0.61 versus a D/E of 0.61 for LM. PLD is therefore the more solvent of the two companies, and has lower financial risk.
PLD trades at a forward P/E of 35.70, a P/B of 2.19, and a P/S of 12.77, compared to a forward P/E of 8.69, a P/B of 0.78, and a P/S of 0.97 for LM. PLD is the expensive 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. PLD is currently priced at a -9.39% to its one-year price target of 70.89. Comparatively, LM is -23.62% relative to its price target of 46.36. This suggests that LM 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. PLD has a beta of 0.83 and LM’s beta is 1.97. PLD’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. PLD has a short ratio of 4.32 compared to a short interest of 7.38 for LM. This implies that the market is currently less bearish on the outlook for PLD.Summary
Legg Mason, Inc. (NYSE:LM) beats Prologis, Inc. (NYSE:PLD) on a total of 10 of the 14 factors compared between the two stocks. LM 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, LM is the cheaper of the two stocks on an earnings, book value and sales basis, LM is more undervalued relative to its price target. Finally, PAVM has better sentiment signals based on short interest.