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. 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. 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. This is 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. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Prologis Inc. (PLD) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Prologis, Inc. is engaged in industrial logistics real estate, focused on markets across the Americas, Europe and Asia. The Company leases modern distribution facilities to more than 4,700 customers, including third-party logistics providers, transportation companies, retailers and manufacturers. The Company’s business consists of two operating segments: Real Estate Operations and Strategic Capital. The Company’s customer base represents a spectrum of international, national, regional and local distribution users. As of December 31, 2014, the Company owned or had investments in, on a wholly owned basis or through co-investment ventures, properties and development projects expected to total approximately 590 million square feet (55 million square meters) in 21 countries.
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Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$22,323,147,051||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||0.65||Fail|
|3. Earnings Stability||Positive EPS for 10 years prior||Fail|
|4. Dividend Record||Dividend Payments for 10 years prior||Pass|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||-36.46%||Fail|
|6. Moderate PEmg Ratio||PEmg < 20||57.62||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||1.55||Pass|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||0.65||Fail|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||-65.03||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Fail|
|4. Dividend Record||Currently Pays Dividend||Pass|
|5. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||15.00%|
|MG Value based on 3% Growth||$10.79|
|MG Value based on 0% Growth||$6.32|
|Market Implied Growth Rate||24.56%|
|% of Intrinsic Value||149.66%|
Prologis Inc. does not qualify for either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth or stability over the last ten years and high PEmg ratio while the Enterprising Investor is concerned with the level of debt relative to the current assets and the insufficient earnings stability over the last five years. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should look for other opportunities or proceed with a cautious speculative attitude.
As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from a loss of $1.71 in 2011 to an estimated gain of $0.74 for 2015. This level of demonstrated earnings growth does not support the market’s implied estimate of 24.56% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Prologis Inc. (PLD)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$31.17|
|Number of Consecutive Years of Dividend Growth||2|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Total Current Assets||$351,025,000|
|Total Current Liabilities||$537,432,000|
|Shares Outstanding (Diluted Average)||530,640,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$1.03|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$0.74|
Other ModernGraham posts about the company
|28 Companies in the Spotlight This Week – 11/1/14|
|Prologis Inc. Annual Valuation – 2014 $PLD|
Other ModernGraham posts about related companies
The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. See my current holdings here. This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please be sure to review our detailed disclaimer.