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 Most Undervalued Companies for the Defensive Investor – March 2015.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 Public Storage (PSA)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Public Storage (the Trust) is a real estate investment trust (REIT). The Trustâ€™s principal business activities includes: Domestic Self-Storage, European Self-Storage and Commercial. It 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 an owner and operator of self-storage facilities in the United States. It has direct and indirect equity interests in 2,200 self-storage facilities located in 38 states within the United States operating under the Public Storage brand name. The Trust has 49% equity interest in Shurgard Europe, with an institutional investor owning the remaining 51% interest. The Trust has 42% equity interest in PS Business Parks, Inc. (PSB), a publicly held REIT which owns and operates 29.7 million net rentable square feet of commercial space. It also wholly owns 1.4 million net rentable square feet of commercial space, all of which is managed by PSB.
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 -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 FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â FAIL
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 -Â FAIL
- Earnings Stability – positive earnings per share for at least 5 years -Â PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$64.23|
|Value Based on 0% Growth||$37.65|
|Market Implied Growth Rate||17.83%|
|Net Current Asset Value (NCAV)||-$0.87|
Balance Sheet – DecemberÂ 2014
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
Public StorageÂ is not suitableÂ for the Enterprising Investor orÂ for the Defensive Investor. Â The Defensive Investor is concerned by the the low current ratio and the high PEmg and PB ratios.Â The Enterprising InvestorÂ is concerned by the level of debt relative to the current assets. Â As a result, value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should exploreÂ other opportunities at this time. Â From a valuation side of things,Â the company appears to be overvaluedÂ after growing its EPSmg (normalized earnings) from $2.72 in 2010 to $4.43Â for 2014. Â This level of demonstrated growth does supportÂ the market’s implied estimate of 17.83% annual earnings growthÂ over the next 7-10 years, leadingÂ the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value aboveÂ the 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 Public Storage (PSA)? 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 Public Storage (PSA)Â orÂ 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 for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.