Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Undervalued Companies for the DefensiveÂ Investor.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Equity Residential (EQR)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Equity Residential (EQR) is a real estate investment trust (REIT). The Company is focused on the acquisition, development and management of multi-family residential properties, which includes the generation of rental and other related income through the leasing of apartment units to residents, in United States. ERP Operating Limited Partnership (or Operating Partnership), which is an Illinois limited partnership, conducts the multifamily residential property business of EQR. All of the Company’s property ownership, development and related business operations are conducted through the Operating Partnership. The Operating Partnership holds all of the assets of the Company, including the Company’s ownership interests in its joint ventures. In December 2012, it acquired four multifamily properties totaling 1,134 units.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â 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 -Â 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 – PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
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 -Â 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 -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|Value Based on 3% Growth||$15.86|
|Value Based on 0% Growth||$9.30|
|Market Implied Growth Rate||23.82%|
|Net Current Asset Value (NCAV)||-$34.17|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Equity Residential is not suitable for either the Defensive Investor or the Enterprising Investor. Â The Defensive Investor has major issues with the low current ratio, lack of earnings stability, and high PEmg ratio while the Enterprising Investor is concerned with the level of debt relative to current assets and the lack of earnings stability. Â As a result, value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities. Â As for a valuation, the company appears overvalued after growing its EPSmg (normalized earnings) from $0.04 in 2010 to an estimated $1.09 for 2014. Â While this is an impressive level of demonstrated growth, it does not support the market’s implied estimate of 23.82% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s methods, to return an estimate of intrinsic value that is below the current market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Equity Residential (EQR)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author held a long position in Equity Residential (EQR) but did not hold a positionÂ in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from wikipedia; this article is not affiliated with the company in any manner.