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Dissecting the Numbers for Fortune Brands Home & Security, Inc. (FBHS) and Extended Stay America, Inc. Paired Shares (STAY)

Fortune Brands Home & Security, Inc. (NYSE:FBHS) shares are down more than -21.55% this year and recently increased 0.56% or $0.3 to settle at $53.69. Extended Stay America, Inc. Paired Shares (NASDAQ:STAY), on the other hand, is up 13.74% year to date as of 06/29/2018. It currently trades at $21.61 and has returned -4.04% during the past week.

Fortune Brands Home & Security, Inc. (NYSE:FBHS) and Extended Stay America, Inc. Paired Shares (NASDAQ:STAY) are the two most active stocks in the Home Furnishings & Fixtures 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 FBHS to grow earnings at a 10.65% annual rate over the next 5 years. Comparatively, STAY is expected to grow at a 6.85% annual rate. All else equal, FBHS’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 47.3% for Extended Stay America, Inc. Paired Shares (STAY). FBHS’s ROI is 12.20% while STAY has a ROI of 9.10%. The interpretation is that FBHS’s business generates a higher return on investment than STAY’s.

Cash Flow



The amount of free cash flow available to investors is ultimately what determines the value of a stock. FBHS’s free cash flow (“FCF”) per share for the trailing twelve months was -0.78. Comparatively, STAY’s free cash flow per share was +0.25. On a percent-of-sales basis, FBHS’s free cash flow was -2.15% while STAY converted 3.7% of its revenues into cash flow. This means that, for a given level of sales, STAY is able to generate more free cash flow for investors.

Liquidity and Financial Risk

FBHS’s debt-to-equity ratio is 0.80 versus a D/E of 3.27 for STAY. STAY is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

FBHS trades at a forward P/E of 13.10, a P/B of 3.42, and a P/S of 1.50, compared to a forward P/E of 17.71, a P/B of 5.48, and a P/S of 3.22 for STAY. FBHS 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

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. FBHS is currently priced at a -20.95% to its one-year price target of 67.92. Comparatively, STAY is -5.88% relative to its price target of 22.96. This suggests that FBHS is the better investment over the next year.

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. FBHS has a beta of 1.35 and STAY’s beta is 0.95. STAY’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. FBHS has a short ratio of 2.86 compared to a short interest of 1.82 for STAY. This implies that the market is currently less bearish on the outlook for STAY.

Summary




Fortune Brands Home & Security, Inc. (NYSE:FBHS) beats Extended Stay America, Inc. Paired Shares (NASDAQ:STAY) on a total of 8 of the 14 factors compared between the two stocks. FBHS is growing fastly, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, FBHS is the cheaper of the two stocks on an earnings, book value and sales basis, FBHS is more undervalued relative to its price target. Finally, ATH has better sentiment signals based on short interest.

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