REITs often attract a great deal of investors because of their strong cash flows and dividends, and those investors often overlook other parts of the business, choosing to analyze the company under a different set of criteria than companies in other sectors. This can create a problem in that it becomes difficult to compare a REIT to an industrial, which is fine if you use the typical top-down approach to stock selection; however, a top-down approach invites speculation in the fact that you are theorizing which sector will perform well going forward. Benjamin Graham taught that we should avoid speculation as much as possible, which is why it is critical to develop a system for analyzing companies that will allow them to be compared across industries. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another investment opportunity. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Prologis Inc. (PLD) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Prologis, Inc. (Prologis) is a real estate investment trust (REIT) and the general partner of the Prologis, L.P. As of December 31, 2012, it owned an approximate 99.59% common general partnership interest in the Prologis, L.P. and 100% of the preferred units in the Prologis, L.P. The Company is a global owner, operator and developer of industrial real estate, focused on markets tied to global trade across the Americas, Europe and Asia. It operates the REIT and the Operating Partnership as one enterprise. The Company operates in two segments: segments: real estate operations and private capital. The Company co-invests in entities that own multiple properties with private capital investors and provide asset and property management services to these entities. Effective January 8, 2014, Prologis Inc acquired six Class-A logistics facilities, located in Nashville, Tennessee. In June 2014, it sold a 7.5 million square foot industrial portfolio in the United States to TPG.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – FAIL
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
Balance Sheet – June 2014
Earnings Per Share
Earnings Per Share – ModernGraham
Prologis Inc. is not suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor is concerned with the low current ratio, the lack of sufficient earnings growth or stability over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor is concerned with the high level of debt relative to the current assets and the lack of stable earnings over the last five years. As a result, value investors following the ModernGraham approach should explore other opportunities at this time. From a valuation side of things, the company appears to be overvalued after growing its EPSmg (normalized earnings) from a loss of $1.65 in 2010 to only an estimated loss of $0.25 in 2014. While this demonstrated growth is somewhat promising, no company with a negative EPSmg will have a strong intrinsic value. The ModernGraham valuation model returns an estimate of intrinsic value that is well below the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Prologis Inc. (PLD)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in Prologis Inc. (PLD) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from wikipedia; this article is not affiliated with the company in any manner.