ModernGraham Valuation: Public Storage (PSA)

moneyCompany Profile (obtained from Google Finance): Public Storage (the Trust) is a real estate investment trust (REIT). As of December 31, 2012, the Trust’s principal business activities included: Domestic Self-Storage, European Self-Storage and Commercial. The Trust acquires, develops, owns, and operates self-storage facilities which offer storage spaces for lease, on a month-to-month basis, for personal and business use. It is a owner and operator of self-storage facilities in the United States. It has direct and indirect equity interests in 2,078 self-storage facilities (132 million net rentable square feet of space) located in 38 states within the United States operating under the Public Storage brand name. The Trust has a 49% equity interest in Shurgard Europe, with an institutional investor owning the remaining 51% interest. It has a 41% equity interest in PS Business Parks, Inc. (PSB), which owns and operates 28.3 million net rentable square feet of commercial space.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. 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 – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. 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 = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $93.72
MG Opinion Overvalued
Value Based on 3% Growth $58.39
Value Based on 0% Growth $34.23
Market Implied Growth Rate 14.64%
Net Current Asset Value (NCAV) -$1.83
PEmg 37.79
Current Ratio 0.23
PB Ratio 2.98

Balance Sheet – 9/30/2013 

Current Assets $57,000,000
Current Liabilities $243,000,000
Total Debt $100,100,000
Total Assets $9,149,900,000
Intangible Assets $217,000,000
Total Liabilities $371,000,000
Outstanding Shares 171,760,000

Earnings Per Share

2013 (estimate) $5.42
2012 $3.83
2011 $3.28
2010 $2.31
2009 $3.52
2008 $4.20
2007 $1.17
2006 $0.32
2005 $1.92
2004 $1.39
2003 $1.27

Earnings Per Share – Modern Graham 

2013 (estimate) $4.03
2012 $3.36
2011 $3.05
2010 $2.73
2009 $2.70
2008 $2.12

Conclusion:

Public Storage is a company that fails to satisfy either the Defensive Investor or the Enterprising Investor because of its low level of current assets.  The ModernGraham system puts a high emphasis on the current ratio, and Public Storage’s balance sheet is largely based on its real estate holdings (which is true for most REITs).  It is possible for a REIT to pass the requirements of the Defensive Investor by passing all of the requirements not dealing with the current ratio, but in this case Public Storage is trading at high PEmg and PB ratios, and therefore is not suitable for the Defensive Investor.  The Enterprising Investor is completely turned off by the level of debt relative to the current assets.  As a result, investors should keep the company on a watch list to see if the PEmg and PB ratios improve.  With regard to the valuation, the market is implying a growth rate of 14.64%, which is not supported by the historical level of growth.  Public Storage has displayed a significant amount of growth, but nowhere near the market’s implied estimate and the company would appear to be overvalued at the current time.

What do you think?  Do you agree that Public Storage is overvalued?  Is the company not suitable for Defensive Investors and Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Public Storage (PSA) at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill


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Comments

2 responses to “ModernGraham Valuation: Public Storage (PSA)”

  1. PeterLongon Avatar

    Too bad i didn’t follow my brother to buy some public storage stock. When the show storage hunter start airing he knew that self storage industry will explode. He was right…..wished i listen to him

    1. Benjamin Clark Avatar

      That is too bad! Hopefully you will find another good investment in the future. Thanks for the comment.

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