Western Asset Mortgage Capital Corporation (NYSE:WMC) and Walker & Dunlop, Inc. (NYSE:WD) are the two most active stocks in the Mortgage Investment 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.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect WMC to grow earnings at a 5.00% annual rate over the next 5 years. Comparatively, WD is expected to grow at a 10.00% annual rate. All else equal, WD’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. Western Asset Mortgage Capital Corporation (WMC) has an EBITDA margin of 69.75%, compared to an EBITDA margin of 56.15% for Walker & Dunlop, Inc. (WD). This suggests that WMC underlying business is more profitable. WMC’s ROI is -1.00% while WD has a ROI of 4.10%. The interpretation is that WD’s business generates a higher return on investment than WMC’s.
If there’s one thing investors care more about than earnings, it’s cash flow. WMC’s free cash flow (“FCF”) per share for the trailing twelve months was -0.65. Comparatively, WD’s free cash flow per share was -7.02. On a percent-of-sales basis, WMC’s free cash flow was -0.09% while WD converted -0.04% of its revenues into cash flow. This means that, for a given level of sales, WD is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. WMC’s debt-to-equity ratio is 6.28 versus a D/E of 2.63 for WD. WMC is therefore the more solvent of the two companies, and has lower financial risk.
WMC trades at a forward P/E of 8.02, a P/B of 1.00, and a P/S of 3.62, compared to a forward P/E of 10.65, a P/B of 2.09, and a P/S of 2.23 for WD. 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. WMC is currently priced at a 18.56% to its one-year price target of $9.00. Comparatively, WD is -2.89% relative to its price target of $48.75. This suggests that WD is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 3.00 for WMC and 2.80 for WD, which implies that analysts are more bullish on the outlook for WMC.
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. WMC has a beta of 0.66 and WD’s beta is 1.41. WMC’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. WMC has a short ratio of 4.38 compared to a short interest of 5.83 for WD. This implies that the market is currently less bearish on the outlook for WMC.
Walker & Dunlop, Inc. (NYSE:WD) beats Western Asset Mortgage Capital Corporation (NYSE:WMC) on a total of 7 of the 13 factors compared between the two stocks. WD is more profitable, generates a higher return on investment, has a higher cash conversion rate and has lower financial risk. WD is more undervalued relative to its price target. Finally, HTGC has better sentiment signals based on short interest.