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 10 Companies Benjamin Graham Would Invest In Today – MarchÂ 2016.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 stock analysis showing a specific look at how Realty Income Corp (O)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance): Realty Income Corporation is a real estate investment trust (REIT). The Company is engaged in in-house acquisition, portfolio management, asset management, credit research, real estate research, legal, finance and accounting, information technology and capital markets capabilities. Its portfolio includes approximately 4,540 properties, of which over 4,519 are single-tenant properties, and the remaining are multi-tenant properties. The Company has over 280 lease expirations and re-leased approximately 250 properties. It sold over 30 vacant properties. The Company has grouped its tenants into 48 activity segments, including Apparel, Automotive tire services, Beverages, Child care, Convenience stores, Dollar stores, Drug stores, Financial services, Food processing, Grocery stores, Health and fitness, Health care, Home improvement, Restaurants-casual dining, Restaurants-quick service, Sporting goods, Theaters, Transportation services, Wholesale club and 30 other non-reportable segments.
Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is aÂ free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.
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||$15,878,261,995||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||4.32||Pass|
|3. Earnings Stability||Positive EPS for 10 years prior||Pass|
|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||53.23%||Pass|
|6. Moderate PEmg Ratio||PEmg < 20||38.21||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||1.69||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||4.32||Pass|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||5.20||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Pass|
|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||10.30%|
|MG Value based on 3% Growth||$23.89|
|MG Value based on 0% Growth||$14.00|
|Market Implied Growth Rate||14.86%|
|% of Intrinsic Value||131.31%|
Realty Income Corp qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the high PEmg ratio. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $0.98 in 2012 to an estimated $1.65 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 14.86% 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.
Realty Income Corp receives an average overall rating in the ModernGraham grading system, scoring a C+.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$70.73|
|Number of Consecutive Years of Dividend Growth||14|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||3/1/2016|
|Total Current Assets||$2,539,727,000|
|Total Current Liabilities||$587,384,000|
|Shares Outstanding (Diluted Average)||153,917,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$2.85|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$1.65|
Other ModernGraham posts about the company
|Realty Income Corporation Annual Valuation â€“ 2014 $O|
|10 Companies in the Spotlight This Week â€“ 12/28/13|
|ModernGraham Valuation: Realty Income Corp (O)|
Other ModernGraham posts about related companies
The author did not hold aÂ position in any company mentioned in this articleÂ at the time of publication and had no intention of changing that position within the next 72 hours. Â See my current holdings here. Â This article is not investment advice; any reader should speak to aÂ registeredÂ investment adviser prior to making any investment decisions. Â ModernGraham is not affiliated with the company in any manner. Â Please be sure to review our detailed disclaimer.