Simon Property Group, Inc. (SPG) vs. Phillips 66 (PSX): Breaking Down the REIT – Retail Industry’s Two Hottest Stocks

Simon Property Group, Inc. (NYSE:SPG) shares are down more than -7.57% this year and recently decreased -1.65% or -$2.6 to settle at $155.27. Phillips 66 (NYSE:PSX), on the other hand, is up 18.62% year to date as of 09/12/2019. It currently trades at $102.19 and has returned 2.39% during the past week.

Simon Property Group, Inc. (NYSE:SPG) and Phillips 66 (NYSE:PSX) are the two most active stocks in the REIT – Retail industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect SPG to grow earnings at a 8.60% annual rate over the next 5 years. Comparatively, PSX is expected to grow at a -4.25% annual rate. All else equal, SPG’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

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 6.4% for Phillips 66 (PSX). SPG’s ROI is 12.00% while PSX has a ROI of 9.40%. The interpretation is that SPG’s business generates a higher return on investment than PSX’s.

Cash Flow

Cash is king when it comes to investing. SPG’s free cash flow (“FCF”) per share for the trailing twelve months was +0.51. Comparatively, PSX’s free cash flow per share was +1.96. On a percent-of-sales basis, SPG’s free cash flow was 2.78% while PSX converted 0.79% of its revenues into cash flow. This means that, for a given level of sales, SPG is able to generate more free cash flow for investors.

Liquidity and Financial Risk

SPG’s debt-to-equity ratio is 8.11 versus a D/E of 0.46 for PSX. SPG is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

SPG trades at a forward P/E of 21.78, a P/B of 16.66, and a P/S of 8.38, compared to a forward P/E of 9.82, a P/B of 1.87, and a P/S of 0.42 for PSX. SPG is the expensive of the two stocks on an earnings, book value and sales basis. 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. SPG is currently priced at a -14.54% to its one-year price target of 181.68. Comparatively, PSX is -13.54% relative to its price target of 118.20. This suggests that SPG is the better investment over the next year.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. SPG has a beta of 0.55 and PSX’s beta is 1.07. SPG’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. SPG has a short ratio of 6.67 compared to a short interest of 2.08 for PSX. This implies that the market is currently less bearish on the outlook for PSX.

Summary

Phillips 66 (NYSE:PSX) beats Simon Property Group, Inc. (NYSE:SPG) on a total of 8 of the 14 factors compared between the two stocks. PSX is growing fastly, higher liquidity and has lower financial risk. In terms of valuation, PSX is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, PSX has better sentiment signals based on short interest.