PepsiCo, Inc. (NASDAQ:PEP) shares are up more than 22.99% this year and recently increased 0.04% or $0.05 to settle at $135.88. Independence Realty Trust, Inc. (NYSE:IRT), on the other hand, is up 59.26% year to date as of 12/02/2019. It currently trades at $14.62 and has returned 1.18% during the past week.
PepsiCo, Inc. (NASDAQ:PEP) and Independence Realty Trust, Inc. (NYSE:IRT) are the two most active stocks in the Beverages – Soft Drinks 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect PEP to grow earnings at a 4.24% annual rate over the next 5 years. Comparatively, IRT is expected to grow at a 5.00% annual rate. All else equal, IRT’s higher growth rate would imply a greater potential for capital appreciation.
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 50.65% for Independence Realty Trust, Inc. (IRT). PEP’s ROI is 28.70% while IRT has a ROI of 3.20%. The interpretation is that PEP’s business generates a higher return on investment than IRT’s.Cash Flow
If there’s one thing investors care more about than earnings, it’s cash flow. PEP’s free cash flow (“FCF”) per share for the trailing twelve months was +1.10. Comparatively, IRT’s free cash flow per share was -0.07. On a percent-of-sales basis, PEP’s free cash flow was 2.37% while IRT converted -0% of its revenues into cash flow. This means that, for a given level of sales, PEP is able to generate more free cash flow for investors.
PEP’s debt-to-equity ratio is 2.30 versus a D/E of 1.64 for IRT. PEP is therefore the more solvent of the two companies, and has lower financial risk.
PEP trades at a forward P/E of 22.78, a P/B of 13.44, and a P/S of 2.87, compared to a forward P/E of 74.59, a P/B of 2.20, and a P/S of 6.61 for IRT. 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. PEP is currently priced at a -2.71% to its one-year price target of 139.67. Comparatively, IRT is 2.67% relative to its price target of 14.24. This suggests that PEP 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. PEP has a beta of 0.55 and IRT’s beta is 0.78. PEP’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. PEP has a short ratio of 2.89 compared to a short interest of 5.31 for IRT. This implies that the market is currently less bearish on the outlook for PEP.
PepsiCo, Inc. (NASDAQ:PEP) beats Independence Realty Trust, Inc. (NYSE:IRT) on a total of 9 of the 14 factors compared between the two stocks. PEP generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, PEP is the cheaper of the two stocks on an earnings and sales basis, PEP is more undervalued relative to its price target. Finally, PEP has better sentiment signals based on short interest.