A Side-by-side Analysis of DiamondRock Hospitality Company (DRH) and Zimmer Biomet Holdings, Inc. (ZBH)

DiamondRock Hospitality Company (NYSE:DRH) shares are up more than 12.89% this year and recently decreased -1.63% or -$0.17 to settle at $10.25. Zimmer Biomet Holdings, Inc. (NYSE:ZBH), on the other hand, is up 36.84% year to date as of 11/07/2019. It currently trades at $141.93 and has returned 2.68% during the past week.

DiamondRock Hospitality Company (NYSE:DRH) and Zimmer Biomet Holdings, Inc. (NYSE:ZBH) are the two most active stocks in the REIT – Hotel/Motel industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider 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 DRH to grow earnings at a -9.50% annual rate over the next 5 years. Comparatively, ZBH is expected to grow at a 5.69% annual rate. All else equal, ZBH’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. 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 8.77% for Zimmer Biomet Holdings, Inc. (ZBH). DRH’s ROI is 4.40% while ZBH has a ROI of -0.30%. The interpretation is that DRH’s business generates a higher return on investment than ZBH’s.

Cash Flow

Cash is king when it comes to investing. DRH’s free cash flow (“FCF”) per share for the trailing twelve months was -0.13. Comparatively, ZBH’s free cash flow per share was +0.54. On a percent-of-sales basis, DRH’s free cash flow was -0% while ZBH converted 1.4% of its revenues into cash flow. This means that, for a given level of sales, ZBH is able to generate more free cash flow for investors.

Liquidity and Financial Risk

DRH’s debt-to-equity ratio is 0.59 versus a D/E of 0.75 for ZBH. ZBH is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

DRH trades at a forward P/E of 25.00, a P/B of 1.14, and a P/S of 2.29, compared to a forward P/E of 17.11, a P/B of 2.49, and a P/S of 3.70 for ZBH. 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. DRH is currently priced at a 4.7% to its one-year price target of 9.79. Comparatively, ZBH is -5.33% relative to its price target of 149.92. This suggests that ZBH 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. DRH has a beta of 1.33 and ZBH’s beta is 1.14. ZBH’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. DRH has a short ratio of 3.19 compared to a short interest of 2.12 for ZBH. This implies that the market is currently less bearish on the outlook for ZBH.

Summary

Zimmer Biomet Holdings, Inc. (NYSE:ZBH) beats DiamondRock Hospitality Company (NYSE:DRH) on a total of 9 of the 14 factors compared between the two stocks. ZBH is more profitable, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. ZBH is more undervalued relative to its price target. Finally, ZBH has better sentiment signals based on short interest.