L Brands, Inc. (NYSE:LB) shares are down more than -39.57% this year and recently increased 0.58% or $0.21 to settle at $36.39. Brookdale Senior Living Inc. (NYSE:BKD), on the other hand, is down -30.82% year to date as of 04/16/2018. It currently trades at $6.71 and has returned 0.60% during the past week.
L Brands, Inc. (NYSE:LB) and Brookdale Senior Living Inc. (NYSE:BKD) are the two most active stocks in the Apparel Stores industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.Growth
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect LB to grow earnings at a 8.41% annual rate over the next 5 years. Comparatively, BKD is expected to grow at a 10.00% annual rate. All else equal, BKD’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. L Brands, Inc. (LB) has an EBITDA margin of 18.12%. This suggests that LB underlying business is more profitable LB’s ROI is 25.90% while BKD has a ROI of -5.70%. The interpretation is that LB’s business generates a higher return on investment than BKD’s.Cash Flow
The value of a stock is simply the present value of its future free cash flows. LB’s free cash flow (“FCF”) per share for the trailing twelve months was +3.49. Comparatively, BKD’s free cash flow per share was +0.15. On a percent-of-sales basis, LB’s free cash flow was 7.8% while BKD converted 0.59% of its revenues into cash flow. This means that, for a given level of sales, LB is able to generate more free cash flow for investors.Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. LB has a current ratio of 1.60 compared to 0.80 for BKD. This means that LB can more easily cover its most immediate liabilities over the next twelve months.Valuation
LB trades at a forward P/E of 10.90, and a P/S of 0.80, compared to a P/B of 0.82, and a P/S of 0.26 for BKD. LB is the cheaper of the two stocks on book value basis but is expensive in terms of P/E 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
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. LB is currently priced at a -24.71% to its one-year price target of 48.33. Comparatively, BKD is -35.04% relative to its price target of 10.33. This suggests that BKD is the better investment over the next year.
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. LB has a beta of 0.76 and BKD’s beta is 1.81. LB’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. LB has a short ratio of 4.19 compared to a short interest of 6.72 for BKD. This implies that the market is currently less bearish on the outlook for LB.Summary
L Brands, Inc. (NYSE:LB) beats Brookdale Senior Living Inc. (NYSE:BKD) on a total of 9 of the 14 factors compared between the two stocks. LB is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. Finally, LB has better sentiment signals based on short interest.