Lennar Corporation (NYSE:LEN) shares are down more than -17.22% this year and recently increased 0.25% or $0.13 to settle at $52.35. Lloyds Banking Group plc (NYSE:LYG), on the other hand, is down -17.33% year to date as of 09/13/2018. It currently trades at $3.10 and has returned 0.00% during the past week.
Lennar Corporation (NYSE:LEN) and Lloyds Banking Group plc (NYSE:LYG) are the two most active stocks in the Residential Construction 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
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect LEN to grow earnings at a 26.02% annual rate over the next 5 years. Comparatively, LYG is expected to grow at a -3.50% annual rate. All else equal, LEN’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Lennar Corporation (LEN) has an EBITDA margin of 9.47%. This suggests that LEN underlying business is more profitable LEN’s ROI is 4.90% while LYG has a ROI of 6.10%. The interpretation is that LYG’s business generates a higher return on investment than LEN’s.Cash Flow
Earnings don’t always accurately reflect the amount of cash that a company brings in. LEN’s free cash flow (“FCF”) per share for the trailing twelve months was +0.98. Comparatively, LYG’s free cash flow per share was -. On a percent-of-sales basis, LEN’s free cash flow was 2.55% while LYG converted 0% of its revenues into cash flow. This means that, for a given level of sales, LEN is able to generate more free cash flow for investors.Financial Risk
LEN’s debt-to-equity ratio is 0.83 versus a D/E of 2.23 for LYG. LYG is therefore the more solvent of the two companies, and has lower financial risk.
LEN trades at a forward P/E of 7.57, a P/B of 1.25, and a P/S of 1.13, compared to a forward P/E of 9.12, a P/B of 0.89, and a P/S of 2.68 for LYG. 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. LEN is currently priced at a -25.81% to its one-year price target of 70.56. Comparatively, LYG is 2.65% relative to its price target of 3.02. This suggests that LEN is the better investment over the next year.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. LEN has a beta of 1.21 and LYG’s beta is 0.84. LYG’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. LEN has a short ratio of 4.10 compared to a short interest of 0.28 for LYG. This implies that the market is currently less bearish on the outlook for LYG.Summary
Lennar Corporation (NYSE:LEN) beats Lloyds Banking Group plc (NYSE:LYG) on a total of 10 of the 14 factors compared between the two stocks. LEN is growing fastly, is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, LEN is the cheaper of the two stocks on an earnings and sales basis, LEN is more undervalued relative to its price target. Finally, STT has better sentiment signals based on short interest.