ModernGraham Valuation: Simon Property Group (SPG)

Company Profile (obtained from Google Finance): Simon Property Group, Inc.( Simon Property), is a self-administered and self-managed real estate investment trust (REIT). Simon Property Group, L.P.(Operating Partnership), is the Company’s majority-owned partnership subsidiary that owns all of its real estate properties and other assets. The Company owns, develops and manages retail real estate properties, which consist primarily of malls, Premium Outlets, The Mills, and community/lifestyle centers. On January 9, 2012, it sold its interest in Gallerie Commerciali Italia, S.p.A. In June 2012, the Company acquired 50% of Silver Sands Factory Stores. In December 2012, the Company acquired Paragon Outlets Grand Prairie in Grand Prairie, Texas and Paragon Outlets Livermore Valley in Livermore, California.

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	$157.90
MG Opinion	Fairly Valued
Value Based on 3% Growth	$59.47
Value Based on 0% Growth	$34.86
Market Implied Growth Rate	14.55%
NCAV	-$78.52
PEmg	37.60
Current Ratio	0.07
PB Ratio	8.31

Balance Sheet – 9/30/2013 

Current Assets	$1,629,200,000
Current Liabilities	$24,954,500,000
Total Debt	$22,729,700,000
Total Assets	$32,111,400,000
Intangible Assets	$0
Total Liabilities	$26,282,600,000
Outstanding Shares	313,980,000

Earnings Per Share

2013 (estimate)	$5.39
2012	$4.72
2011	$3.48
2010	$2.10
2009	$1.05
2008	$1.83
2007	$2.03
2006	$2.14
2005	$1.24
2004	$1.41
2003	$1.49

Earnings Per Share – Modern Graham 

2013 (estimate)	$4.10
2012	$3.18
2011	$2.31
2010	$1.76
2009	$1.61
2008	$1.84

Conclusion:

Simon Property Group is a REIT that has shown strong earnings growth over the historical period.  Unfortunately, the company does not qualify for either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the company comes up short in the current ratio, and has PEmg and PB ratios that are too high.  For the Enterprising Investor, the company’s high level of debt relative to its current assets disqualifies it from potential investment.  Value investors seeking to follow ModernGraham’s modernized version of Benjamin Graham’s methods should do further research into other companies, including reviewing ModernGraham’s valuation of Realty Income Corp (O).  From a valuation perspective, Simon Property Group performs fairly well.  Its EPSmg (normalized earnings) have grown from $1.84 in 2008 to an estimated $4.10 for 2013.  This is strong growth that supports the market’s current estimate of 14.55% growth, leading to a conclusion that the company may be fairly valued at the current time.

What do you think?  Do you agree that Simon Property Group is fairly valued?  What would be your assessment?  Is the company not suitable for Defensive Investors and Enterprising Investors?  Leave a comment on our Facebook page 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 Simon Property Group (SPG) at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill