La Quinta Holdings Inc. (NYSE:LQ) shares are up more than 18.72% this year and recently decreased -0.30% or -$0.05 to settle at $16.87. Eldorado Resorts, Inc. (NASDAQ:ERI), on the other hand, is up 69.03% year to date as of 11/10/2017. It currently trades at $28.65 and has returned 2.32% during the past week.
La Quinta Holdings Inc. (NYSE:LQ) and Eldorado Resorts, Inc. (NASDAQ:ERI) are the two most active stocks in the Resorts & Casinos 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.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect LQ to grow earnings at a 6.79% annual rate over the next 5 years. Comparatively, ERI is expected to grow at a 5.00% annual rate. All else equal, LQ’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 10.61% for Eldorado Resorts, Inc. (ERI). LQ’s ROI is 3.30% while ERI has a ROI of 6.90%. The interpretation is that ERI’s business generates a higher return on investment than LQ’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. LQ’s free cash flow (“FCF”) per share for the trailing twelve months was +0.15. Comparatively, ERI’s free cash flow per share was +0.58. On a percent-of-sales basis, LQ’s free cash flow was 1.75% while ERI converted 0% of its revenues into cash flow. This means that, for a given level of sales, LQ 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. LQ has a current ratio of 1.30 compared to 1.80 for ERI. This means that ERI can more easily cover its most immediate liabilities over the next twelve months. LQ’s debt-to-equity ratio is 2.48 versus a D/E of 2.61 for ERI. ERI is therefore the more solvent of the two companies, and has lower financial risk.
LQ trades at a forward P/E of 44.99, a P/B of 2.86, and a P/S of 2.01, compared to a forward P/E of 18.47, a P/B of 2.58, and a P/S of 1.81 for ERI. LQ 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
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. LQ is currently priced at a -4.64% to its one-year price target of 17.69. Comparatively, ERI is -4.5% relative to its price target of 30.00. This suggests that LQ 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 LQ and 2.20 for ERI, which implies that analysts are more bullish on the outlook for LQ.
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. LQ has a short ratio of 1.03 compared to a short interest of 12.16 for ERI. This implies that the market is currently less bearish on the outlook for LQ.
Eldorado Resorts, Inc. (NASDAQ:ERI) beats La Quinta Holdings Inc. (NYSE:LQ) on a total of 8 of the 14 factors compared between the two stocks. ERI is growing fastly, has higher cash flow per share and higher liquidity. In terms of valuation, ERI is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, PENN has better sentiment signals based on short interest.