REITs often attract a great deal of investors because of their strong cash flows and dividends, and those investors often overlook other parts of the business, choosing to analyze the company under a different set of criteria than companies in other sectors. Â This can create a problem in that it becomes difficult to compare a REIT to an industrial, which is fine if you use the typical top-down approach to stock selection; however, a top-down approach invites speculation in the fact that you are theorizing which sector will perform well going forward. Â Benjamin Graham taught that we should avoid speculation as much as possible, which is why it is critical to develop a system for analyzing companies that will allow them to be compared across industries. 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 investment opportunity. 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 Macerich Company (MAC) fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â The Macerich Company is a fully integrated self-managed and self-administered real estate investment trust (REIT), which focuses on the acquisition, leasing, management, development and redevelopment of regional malls throughout the United States. The Company owns 54 million square feet of real estate consisting primarily of interests in 51 regional shopping centers. The Company specializes in retail properties with presence in the Pacific Rim, Arizona, Chicago and the Metro New York to Washington, DC corridor.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- 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 -Â PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â PASS
- 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 = 3/5
- 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 -Â PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$71.85|
|Value Based on 0% Growth||$42.12|
|Market Implied Growth Rate||4.14%|
Balance Sheet – DecemberÂ 2014
Earnings Per Share
Earnings Per Share – ModernGraham
Macerich Company is a rare REIT which qualifies for both the Defensive Investor and the Enterprising Investor. Â The Defensive Investor has only one concern, which is regarding the low current ratio, and since the company qualifies for the more conservative Defensive Investor, the Enterprising Investor is willing to overlook concerns with the level of debt relative to the current assets.Â As a result, value investors following the ModernGraham approach should feel comfortable proceeding with further research into the company. Â From a valuation side of things, the company appears to be undervalued afterÂ growing its EPSmg (normalized earnings) from $1.22Â in 2010 to $4.96Â in 2014. Â This level of demonstrated growth is greater than the market’s implied estimate of 4.14% annual earnings growth over the next 7-10 yeas. Â As a result, the ModernGraham valuation model returns an estimate of intrinsic value well above the current price.
Be sure to check out previous ModernGraham valuations of Macerich Company (MAC)Â for greater perspective!
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 Macerich Company (MAC)? 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 did not hold a position in Macerich Company (MAC)Â or any other company mentioned in the 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.