Liberty Property Trust (LPT) vs. A. O. Smith Corporation (AOS): Which is the Better Investment?

Liberty Property Trust (NYSE:LPT) shares are up more than 21.42% this year and recently decreased -0.70% or -$0.36 to settle at $50.85. A. O. Smith Corporation (NYSE:AOS), on the other hand, is up 6.46% year to date as of 10/09/2019. It currently trades at $45.46 and has returned 0.60% during the past week.

Liberty Property Trust (NYSE:LPT) and A. O. Smith Corporation (NYSE:AOS) are the two most active stocks in the REIT – Office 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

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect LPT to grow earnings at a 5.00% annual rate over the next 5 years. Comparatively, AOS is expected to grow at a 6.40% annual rate. All else equal, AOS’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 19.94% for A. O. Smith Corporation (AOS). LPT’s ROI is 0.80% while AOS has a ROI of 22.90%. The interpretation is that AOS’s business generates a higher return on investment than LPT’s.

Cash Flow

Cash is king when it comes to investing. LPT’s free cash flow (“FCF”) per share for the trailing twelve months was +0.03. Comparatively, AOS’s free cash flow per share was +0.41. On a percent-of-sales basis, LPT’s free cash flow was 0% while AOS converted 2.11% of its revenues into cash flow. This means that, for a given level of sales, AOS is able to generate more free cash flow for investors.

Liquidity and Financial Risk

LPT’s debt-to-equity ratio is 0.92 versus a D/E of 0.21 for AOS. LPT is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

LPT trades at a forward P/E of 34.76, a P/B of 2.24, and a P/S of 12.10, compared to a forward P/E of 16.94, a P/B of 4.40, and a P/S of 2.40 for AOS. LPT 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

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. LPT is currently priced at a -3.86% to its one-year price target of 52.89. Comparatively, AOS is -12.58% relative to its price target of 52.00. This suggests that AOS 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. LPT has a beta of 0.76 and AOS’s beta is 1.50. LPT’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. LPT has a short ratio of 2.11 compared to a short interest of 5.04 for AOS. This implies that the market is currently less bearish on the outlook for LPT.

Summary

A. O. Smith Corporation (NYSE:AOS) beats Liberty Property Trust (NYSE:LPT) on a total of 10 of the 14 factors compared between the two stocks. AOS 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. In terms of valuation, AOS is the cheaper of the two stocks on an earnings and sales basis, AOS is more undervalued relative to its price target.