Critical Comparison: Arbor Realty Trust, Inc. (ABR) vs. Tempur Sealy International, Inc. (TPX)

Arbor Realty Trust, Inc. (NYSE:ABR) shares are up more than 47.67% this year and recently decreased -1.91% or -$0.29 to settle at $14.87. Tempur Sealy International, Inc. (NYSE:TPX), on the other hand, is up 102.05% year to date as of 12/02/2019. It currently trades at $83.65 and has returned -0.57% during the past week.

Arbor Realty Trust, Inc. (NYSE:ABR) and Tempur Sealy International, Inc. (NYSE:TPX) are the two most active stocks in the REIT – Diversified industry 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

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 ABR to grow earnings at a 8.00% annual rate over the next 5 years. Comparatively, TPX is expected to grow at a 37.20% annual rate. All else equal, TPX’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., compared to an EBITDA margin of 13.84% for Tempur Sealy International, Inc. (TPX). ABR’s ROI is 3.50% while TPX has a ROI of 10.60%. The interpretation is that TPX’s business generates a higher return on investment than ABR’s.

Cash Flow

Cash is king when it comes to investing. ABR’s free cash flow (“FCF”) per share for the trailing twelve months was +0.90. Comparatively, TPX’s free cash flow per share was +2.40. On a percent-of-sales basis, ABR’s free cash flow was 0.02% while TPX converted 4.8% of its revenues into cash flow. This means that, for a given level of sales, TPX is able to generate more free cash flow for investors.

Liquidity and Financial Risk

ABR’s debt-to-equity ratio is 4.28 versus a D/E of 4.66 for TPX. TPX is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

ABR trades at a forward P/E of 10.87, a P/B of 1.50, and a P/S of 2.67, compared to a forward P/E of 15.28, a P/B of 13.58, and a P/S of 1.56 for TPX. 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 is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. ABR is currently priced at a 4.72% to its one-year price target of 14.20. Comparatively, TPX is -12.77% relative to its price target of 95.90. This suggests that TPX is the better investment over the next year.

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. ABR has a beta of 0.63 and TPX’s beta is 1.65. ABR’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. ABR has a short ratio of 7.52 compared to a short interest of 4.17 for TPX. This implies that the market is currently less bearish on the outlook for TPX.

Summary

Tempur Sealy International, Inc. (NYSE:TPX) beats Arbor Realty Trust, Inc. (NYSE:ABR) on a total of 9 of the 14 factors compared between the two stocks. TPX is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. TPX is more undervalued relative to its price target. Finally, TPX has better sentiment signals based on short interest.