Earnings

Choosing Between DiamondRock Hospitality Company (DRH) and LaSalle Hotel Properties (LHO)

DiamondRock Hospitality Company (NYSE:DRH) shares are down more than -3.38% this year and recently decreased -1.85% or -$0.21 to settle at $11.14. LaSalle Hotel Properties (NYSE:LHO), on the other hand, is down -6.73% year to date as of 11/10/2017. It currently trades at $28.42 and has returned -0.28% during the past week.

DiamondRock Hospitality Company (NYSE:DRH) and LaSalle Hotel Properties (NYSE:LHO) are the two most active stocks in the REIT – Hotel/Motel industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

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 DRH to grow earnings at a -9.50% annual rate over the next 5 years.



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., compared to an EBITDA margin of 34.79% for LaSalle Hotel Properties (LHO). DRH’s ROI is 5.30% while LHO has a ROI of 5.10%. The interpretation is that DRH’s business generates a higher return on investment than LHO’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 +0.11. Comparatively, LHO’s free cash flow per share was +0.13. On a percent-of-sales basis, DRH’s free cash flow was 0% while LHO converted 1.2% of its revenues into cash flow. This means that, for a given level of sales, LHO is able to generate more free cash flow for investors.

Financial Risk

DRH’s debt-to-equity ratio is 0.51 versus a D/E of 0.45 for LHO. DRH is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

DRH trades at a forward P/E of 23.26, a P/B of 1.22, and a P/S of 2.55, compared to a forward P/E of 38.35, a P/B of 1.28, and a P/S of 2.84 for LHO. DRH is the cheaper 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 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. DRH is currently priced at a -3.3% to its one-year price target of 11.52. Comparatively, LHO is -0.07% relative to its price target of 28.44. This suggests that DRH 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 DRH and 3.10 for LHO, which implies that analysts are more bullish on the outlook for LHO.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. DRH has a beta of 1.34 and LHO’s beta is 1.14. LHO’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.DRH has a short ratio of 6.92 compared to a short interest of 9.28 for LHO. This implies that the market is currently less bearish on the outlook for DRH.

Summary

DiamondRock Hospitality Company (NYSE:DRH) beats LaSalle Hotel Properties (NYSE:LHO) on a total of 8 of the 14 factors compared between the two stocks. DRH generates a higher return on investment and higher liquidity. In terms of valuation, DRH is the cheaper of the two stocks on an earnings, book value and sales basis, DRH is more undervalued relative to its price target. Finally, DRH has better sentiment signals based on short interest.

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