Host Hotels & Resorts, Inc. (NYSE:HST) shares are up more than 6.20% this year and recently decreased -1.77% or -$0.38 to settle at $21.08. Caterpillar Inc. (NYSE:CAT), on the other hand, is down -1.82% year to date as of 06/13/2018. It currently trades at $154.71 and has returned -1.15% during the past week.
Host Hotels & Resorts, Inc. (NYSE:HST) and Caterpillar Inc. (NYSE:CAT) are the two most active stocks in the REIT – Hotel/Motel industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.Growth
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect HST to grow earnings at a 28.40% annual rate over the next 5 years. Comparatively, CAT is expected to grow at a 23.31% annual rate. All else equal, HST’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 18.09% for Caterpillar Inc. (CAT). HST’s ROI is 5.50% while CAT has a ROI of 7.30%. The interpretation is that CAT’s business generates a higher return on investment than HST’s.Cash Flow
Cash is king when it comes to investing. HST’s free cash flow (“FCF”) per share for the trailing twelve months was -0.07. Comparatively, CAT’s free cash flow per share was -0.48. On a percent-of-sales basis, HST’s free cash flow was -0.96% while CAT converted -0.63% of its revenues into cash flow. This means that, for a given level of sales, CAT is able to generate more free cash flow for investors.Liquidity and Financial Risk
HST’s debt-to-equity ratio is 0.60 versus a D/E of 2.32 for CAT. CAT is therefore the more solvent of the two companies, and has lower financial risk.
HST trades at a forward P/E of 28.45, a P/B of 2.20, and a P/S of 2.92, compared to a forward P/E of 12.85, a P/B of 6.08, and a P/S of 1.92 for CAT. HST 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. HST is currently priced at a -1.63% to its one-year price target of 21.43. Comparatively, CAT is -10.3% relative to its price target of 172.48. This suggests that CAT is the better investment over the next year.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. HST has a beta of 1.30 and CAT’s beta is 1.30. CAT’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. HST has a short ratio of 5.56 compared to a short interest of 1.97 for CAT. This implies that the market is currently less bearish on the outlook for CAT.Summary
Caterpillar Inc. (NYSE:CAT) beats Host Hotels & Resorts, Inc. (NYSE:HST) on a total of 8 of the 14 factors compared between the two stocks. CAT is growing fastly, has a higher cash conversion rate and higher liquidity. In terms of valuation, CAT is the cheaper of the two stocks on an earnings and sales basis, CAT is more undervalued relative to its price target. Finally, CAT has better sentiment signals based on short interest.