Realty Income Corporation (NYSE:O) and Ramco-Gershenson Properties Trust (NYSE:RPT) are the two most active stocks in the REIT – Retail industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

**Growth**

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect O to grow earnings at a 7.80% annual rate over the next 5 years. Comparatively, RPT is expected to grow at a 5.00% annual rate. All else equal, O’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. Realty Income Corporation (O) has an EBITDA margin of 90.52%, compared to an EBITDA margin of 66.63% for Ramco-Gershenson Properties Trust (RPT). This suggests that O underlying business is more profitable. O’s ROI is 2.40% while RPT has a ROI of 3.90%. The interpretation is that RPT’s business generates a higher return on investment than O’s.

**Cash Flow **

The value of a stock is simply the present value of its future free cash flows. O’s free cash flow (“FCF”) per share for the trailing twelve months was +0.25. Comparatively, RPT’s free cash flow per share was -0.05. On a percent-of-sales basis, O’s free cash flow was 6.22% while RPT converted -0% of its revenues into cash flow. This means that, for a given level of sales, O is able to generate more free cash flow for investors.

**Liquidity and Financial Risk**

Liquidity and leverage ratios are important because they reveal the financial health of a company. O’s debt-to-equity ratio is 0.86 versus a D/E of 1.58 for RPT. RPT is therefore the more solvent of the two companies, and has lower financial risk.

**Valuation**

O trades at a forward P/E of 46.74, a P/B of 2.26, and a P/S of 13.77, compared to a forward P/E of 53.47, a P/B of 1.38, and a P/S of 4.05 for RPT. O is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B 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. O is currently priced at a -2.75% to its one-year price target of $59.74. Comparatively, RPT is -12.59% relative to its price target of $15.17. This suggests that RPT 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 2.80 for O and 2.60 for RPT, which implies that analysts are more bullish on the outlook for O.

**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. O has a beta of 0.33 and RPT’s beta is 0.77. O’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. O has a short ratio of 13.21 compared to a short interest of 3.39 for RPT. This implies that the market is currently less bearish on the outlook for RPT.

**Summary**

Realty Income Corporation (NYSE:O) beats Ramco-Gershenson Properties Trust (NYSE:RPT) on a total of 7 of the 13 factors compared between the two stocks. O is growing fastly, is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. Finally, DRH has better sentiment signals based on short interest.