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Starwood Property Trust Inc. Valuation – October 2015 Update $STWD

In the wake of the great financial crisis it can sometimes be difficult for Intelligent Investors to find a solid financial company in which to invest, because they require specific achievements over the historical period.  Many investors may simply decide to throw out the worst years with the rationale that they are outliers that shouldn’t be considered when evaluating the company’s prospects, but doing so would involve speculation.

We don’t know whether the financial crisis will happen again, but we do know that if it does, we can expect to see similar results as we did before.  By continuing to require the same standards for the historical period, Intelligent Investors are able to whittle down banks to only those with the best financial position, and then they are able to determine an intrinsic value to get a sense of whether the company is a good investment.

In addition, a company must have strong financial statements to prove that it is stable enough for Intelligent Investors.  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 company.  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 Starwood Property Trust Inc. (STWD) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Starwood Property Trust, Inc. is a holding company that operates as a real estate investment trust (REIT). The Company, through its subsidiaries, focuses on originating, acquiring, financing and managing commercial mortgage loans, commercial mortgage-backed securities (CMBS), and other commercial real estate-related debt investments in the United States and Europe. The Company operates through two segments: Lending Segment, and Investing and Servicing Segment. The Company’s Lending Segment represents investments in real estate-related loans and securities that are held-for-investment. The Investing and Servicing Segment includes servicing businesses in the United States and Europe, an investment business that acquires and manages real estate finance investments, and a mortgage loan business. The Company is externally managed and advised by SPT Management, LLC, an affiliate of Starwood Capital Group.
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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is a free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of STWD – October 2015

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass all 6 of the following tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $4,902,897,918 Pass
2. Earnings Stability Positive EPS for 10 years prior Fail
3. Dividend Record Dividend Payments for 10 years prior Fail
4. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 2039900.00% Pass
5. Moderate PEmg Ratio PEmg < 20 10.32 Pass
6. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.15 Pass
Score
Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.
1. Earnings Stability Positive EPS for 5 years prior Pass
2. Dividend Record Currently Pays Dividend Pass
3. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

STWD value Chart October 2015

EPSmg $1.97
MG Growth Estimate 15.00%
MG Value $76.02
Opinion Undervalued
MG Value based on 3% Growth $28.63
MG Value based on 0% Growth $16.78
Market Implied Growth Rate 0.91%
Current Price $20.38
% of Intrinsic Value 26.81%

Starwood Property Trust Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor has concerns regarding the company’s short history as a publicly traded entity while the Enterprising Investor has no initial concerns.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the next stage of the analysis.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.75 in 2011 to an estimated $1.97 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 0.91% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the 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 Starwood Property Trust Inc. (STWD)?  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.

Stage 3: Information for Further Research

STWD Charts October 2015

Graham Number $28.55
PEmg 10.32
PB Ratio 1.15
Dividend Yield 9.42%
Number of Consecutive Years of Dividend Growth 7

 

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Most Recent Balance Sheet Figures

Long-Term Debt $1,315,245,000
Total Assets $101,585,200,000
Intangible Assets $316,044,000
Total Liabilities $97,391,410,000
Shares Outstanding (Diluted Average) 235,831,000

Earnings Per Share History

Next Fiscal Year Estimate $2.06
Dec14 $2.24
Dec13 $1.82
Dec12 $1.76
Dec11 $1.38
Dec10 $1.14
Dec09 -$0.06

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $1.97
Dec14 $1.84
Dec13 $1.50
Dec12 $1.17
Dec11 $0.75
Dec10 $0.36
Dec09 -$0.02

Recommended Reading:

Other ModernGraham posts about the company

10 Most Undervalued Companies for the Enterprising Investor – October 2015
The Best Companies of the Banking Industry – October 2015
5 Undervalued Companies for Enterprising Investors Near 52 Week Lows – October 2015
10 Companies Benjamin Graham Would Invest In Today – October 2015
10 Most Undervalued Companies for the Enterprising Investor – August 2015

Other ModernGraham posts about related companies

The Best Companies of the Banking Industry – October 2015
Comerica Inc. Valuation – October 2015 Update $CMA
Bank of New York Mellon Corporation Analysis – October 2015 Update $BK
Fifth Third Bancorp Analysis – October 2015 Update $FITB
Huntington Bancshares Inc. Analysis – October 2015 Update $HBAN
JPMorgan Chase & Co. Analysis – September 2015 Update $JPM
Citigroup Inc. Analysis – September 2015 Update $C
Wells Fargo & Co. Analysis – September 2015 Update $WFC
People’s United Financial Inc. Analysis – August 2015 Update $PBCT
M&T Bank Corporation Analysis – August 2015 Update $MTB

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please review our detailed disclaimer.

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