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Saturday, January 19, 2019

Equity Residential Valuation – August 2016 $EQR


Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  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 or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – July 2016.  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 stock analysis showing a specific look at how Equity Residential (EQR) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Equity Residential is a real estate investment trust. The Company is focused on the acquisition, development and management of apartment properties in various markets of the United States. The Company’s segments include Boston, New York, San Francisco, Seattle, Southern California, Washington D.C., Non-core – South Florida, Non-core – Denver, and Non-core – other. ERP Operating Limited Partnership (Operating Partnership) conducts the multifamily residential property business of the Company. The Company’s property ownership, development and related business operations are conducted through the Operating Partnership. The Company holds interests in approximately 390 properties located in over 10 states and the District of Columbia, consisting of approximately 109,650 apartment units. Its properties are of various building types, such as garden, mid/high-rise and military housing. Its core properties are located in New York, Los Angeles, Boston, Seattle and San Diego, among others.

EQR Chart

EQR data by YCharts

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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 EQR – August 2016

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 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $23,805,390,893 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.32 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 160.46% Pass
6. Moderate PEmg Ratio PEmg < 20 11.29 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.24 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.32 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 61.13 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

EQR value chart August 2016

EPSmg $5.79
MG Growth Estimate 15.00%
MG Value $223.04
Opinion Undervalued
MG Grade A
MG Value based on 3% Growth $84.00
MG Value based on 0% Growth $49.24
Market Implied Growth Rate 1.39%
Current Price $65.38
% of Intrinsic Value 29.31%

Equity Residential qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the low current ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $2.15 in 2012 to an estimated $5.79 for 2016. This level of demonstrated earnings growth outpaces the market’s implied estimate of 1.39% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Equity Residential revealed the company was trading below its Graham Number of $90.07. The company pays a dividend of $2.11 per share, for a yield of 3.2%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 11.29, which was below the industry average of 34.03, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-24.85.

Equity Residential fares extremely well in the ModernGraham grading system, scoring an A.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$24.85
Graham Number $90.07
PEmg 11.29
Current Ratio 1.32
PB Ratio 2.24
Current Dividend $2.11
Dividend Yield 3.23%
Number of Consecutive Years of Dividend Growth 0

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Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2016
Total Current Assets $575,430,000
Total Current Liabilities $436,207,000
Long-Term Debt $8,510,994,000
Total Assets $21,229,922,000
Intangible Assets $0
Total Liabilities $10,069,344,000
Shares Outstanding (Diluted Average) 382,065,000

Earnings Per Share History

Next Fiscal Year Estimate $11.85
Dec2015 $2.36
Dec2014 $1.73
Dec2013 $5.16
Dec2012 $2.70
Dec2011 $2.98
Dec2010 $0.95
Dec2009 $1.27
Dec2008 $1.46
Dec2007 $3.39
Dec2006 $3.50
Dec2005 $2.79
Dec2004 $1.50
Dec2003 $1.57
Dec2002 $1.18
Dec2001 $1.34
Dec2000 $1.67
Dec1999 $1.14
Dec1998 $0.82
Dec1997 $0.88
Dec1996 $0.85

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $5.79
Dec2015 $2.84
Dec2014 $2.95
Dec2013 $3.25
Dec2012 $2.15
Dec2011 $1.92
Dec2010 $1.63
Dec2009 $2.14
Dec2008 $2.56
Dec2007 $2.93
Dec2006 $2.50
Dec2005 $1.89
Dec2004 $1.44
Dec2003 $1.40
Dec2002 $1.29
Dec2001 $1.29
Dec2000 $1.20

Recommended Reading:

Other ModernGraham posts about the company

Equity Residential Analysis – 2015 Update $EQR
17 Companies in the Spotlight This Week – June 21, 2014
Equity Residential Annual Valuation – 2014 $EQR

Other ModernGraham posts about related companies

Host Hotels and Resorts Inc Valuation – July 2016 $HST
Iron Mountain Inc Valuation – July 2016 $IRM
Vornado Realty Trust Valuation – July 2016 $VNO
Public Storage Valuation – July 2016 $PSA
Macerich Co Valuation – July 2016 $MAC
HCP Inc Valuation – July 2016 $HCP
Apartment Investment & Management Co Valuation – July 2016 $AIV
Crown Castle International Corp Valuation – June 2016 $CCI
General Growth Properties Inc Valuation – June 2016 $GGP
Boston Properties Inc Valuation – June 2016 $BXP

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 be sure to review our detailed disclaimer.

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