iStar Inc. (NYSE:STAR) shares are up more than 38.28% this year and recently decreased -2.39% or -$0.31 to settle at $12.68. Parker-Hannifin Corporation (NYSE:PH), on the other hand, is up 32.41% year to date as of 12/02/2019. It currently trades at $197.48 and has returned -0.22% during the past week.
iStar Inc. (NYSE:STAR) and Parker-Hannifin Corporation (NYSE:PH) are the two most active stocks in the REIT – Diversified industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect STAR to grow earnings at a 0.00% annual rate over the next 5 years. Comparatively, PH is expected to grow at a 5.56% annual rate. All else equal, PH’s higher growth rate would imply a greater potential for capital appreciation.
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 17.87% for Parker-Hannifin Corporation (PH). STAR’s ROI is -1.80% while PH has a ROI of 11.70%. The interpretation is that PH’s business generates a higher return on investment than STAR’s.Cash Flow
Cash is king when it comes to investing. STAR’s free cash flow (“FCF”) per share for the trailing twelve months was -0.77. Comparatively, PH’s free cash flow per share was +2.19. On a percent-of-sales basis, STAR’s free cash flow was -0.01% while PH converted 1.96% of its revenues into cash flow. This means that, for a given level of sales, PH is able to generate more free cash flow for investors.
STAR’s debt-to-equity ratio is 3.60 versus a D/E of 1.49 for PH. STAR is therefore the more solvent of the two companies, and has lower financial risk.
STAR trades at a forward P/E of 16.26, a P/B of 0.71, and a P/S of 1.83, compared to a forward P/E of 16.76, a P/B of 4.16, and a P/S of 1.80 for PH. 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. STAR is currently priced at a -14.03% to its one-year price target of 14.75. Comparatively, PH is 0.06% relative to its price target of 197.37. This suggests that STAR 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. STAR has a beta of 0.64 and PH’s beta is 1.57. STAR’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. STAR has a short ratio of 21.03 compared to a short interest of 2.62 for PH. This implies that the market is currently less bearish on the outlook for PH.
Parker-Hannifin Corporation (NYSE:PH) beats iStar Inc. (NYSE:STAR) on a total of 8 of the 14 factors compared between the two stocks. PH 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, PH has better sentiment signals based on short interest.