Earnings

A Side-by-side Analysis of UDR, Inc. (UDR) and Two Harbors Investment Corp. (TWO)

UDR, Inc. (NYSE:UDR) shares are down more than -10.15% this year and recently increased 0.61% or $0.21 to settle at $34.61. Two Harbors Investment Corp. (NYSE:TWO), on the other hand, is down -3.57% year to date as of 02/19/2018. It currently trades at $15.68 and has returned 6.16% during the past week.

UDR, Inc. (NYSE:UDR) and Two Harbors Investment Corp. (NYSE:TWO) are the two most active stocks in the market 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.

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. Comparatively, TWO is expected to grow at a -1.04% annual rate. All else equal, UDR’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., compared to an EBITDA margin of 130.38% for Two Harbors Investment Corp. (TWO). UDR’s ROI is 2.80% while TWO has a ROI of 1.60%. The interpretation is that UDR’s business generates a higher return on investment than TWO’s.

Cash Flow 




Earnings don’t always accurately reflect the amount of cash that a company brings in. On a percent-of-sales basis, UDR’s free cash flow was 0% while TWO converted 0% of its revenues into cash flow. This means that, for a given level of sales, UDR is able to generate more free cash flow for investors.

Financial Risk

UDR’s debt-to-equity ratio is 1.31 versus a D/E of 6.64 for TWO. TWO is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

UDR trades at a forward P/E of 106.49, a P/B of 3.30, and a P/S of 9.25, compared to a forward P/E of 8.40, a P/B of 0.78, and a P/S of 3.82 for TWO. UDR 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

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. UDR is currently priced at a -12.56% to its one-year price target of 39.58. Comparatively, TWO is -5.6% relative to its price target of 16.61. This suggests that UDR 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 UDR and 1.90 for TWO, which implies that analysts are more bullish on the outlook for UDR.

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. UDR has a beta of 0.37 and TWO’s beta is 0.38. UDR’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. UDR has a short ratio of 3.37 compared to a short interest of 2.39 for TWO. This implies that the market is currently less bearish on the outlook for TWO.

Summary

Two Harbors Investment Corp. (NYSE:TWO) beats UDR, Inc. (NYSE:UDR) on a total of 6 of the 14 factors compared between the two stocks. TWO is growing fastly. In terms of valuation, TWO is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, TWO has better sentiment signals based on short interest.

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