DiamondRock Hospitality Company (NYSE:DRH) shares are up more than 6.91% this year and recently decreased -1.55% or -$0.19 to settle at $12.07. Leggett & Platt, Incorporated (NYSE:LEG), on the other hand, is down -7.77% year to date as of 06/13/2018. It currently trades at $44.02 and has returned 2.92% during the past week.
DiamondRock Hospitality Company (NYSE:DRH) and Leggett & Platt, Incorporated (NYSE:LEG) 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
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 DRH to grow earnings at a -9.50% annual rate over the next 5 years. Comparatively, LEG is expected to grow at a 8.90% annual rate. All else equal, LEG’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 14.09% for Leggett & Platt, Incorporated (LEG). DRH’s ROI is 4.50% while LEG has a ROI of 15.50%. The interpretation is that LEG’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, LEG’s free cash flow per share was -0.32. On a percent-of-sales basis, DRH’s free cash flow was -0% while LEG converted -1.07% of its revenues into cash flow. This means that, for a given level of sales, DRH 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 1.16 for LEG. LEG is therefore the more solvent of the two companies, and has lower financial risk.
DRH trades at a forward P/E of 23.48, a P/B of 1.34, and a P/S of 2.86, compared to a forward P/E of 14.63, a P/B of 4.98, and a P/S of 1.48 for LEG. 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
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. DRH is currently priced at a 0.42% to its one-year price target of 12.02. Comparatively, LEG is -13.4% relative to its price target of 50.83. This suggests that LEG is the better investment over the next year.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. DRH has a beta of 1.41 and LEG’s beta is 0.91. LEG’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. DRH has a short ratio of 3.59 compared to a short interest of 7.65 for LEG. This implies that the market is currently less bearish on the outlook for DRH.Summary
Leggett & Platt, Incorporated (NYSE:LEG) beats DiamondRock Hospitality Company (NYSE:DRH) on a total of 9 of the 14 factors compared between the two stocks. LEG has higher cash flow per share, is more profitable, generates a higher return on investment and higher liquidity. In terms of valuation, LEG is the cheaper of the two stocks on an earnings and sales basis, LEG is more undervalued relative to its price target.