REIT Stocks

AvalonBay Communities Inc Valuation – February 2018 $AVB

Company Profile (obtained from Marketwatch): AvalonBay Communities, Inc. operates as a real estate investment trust, which engages in the development, redevelopment, acquisition, ownership, and operation of multifamily communities. It operates through the following segments: Established Communities, Other Stabilized Communities, and Development or Redevelopment Communities. The Established Communities segment refers to the operating communities that were owned and had stabilized occupancy. The Other Stabilized Communities segment includes all other completed communities that have stabilized occupancy. The Development or Redevelopment Communities segment consists of communities that are under construction. The company was founded by Gilbert M. Meyer in 1978 and is headquartered in Arlington, VA.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of AVB – February 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $21,545,664,869 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.37 Fail
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 104.40% Pass
6. Moderate PEmg Ratio PEmg < 20 27.38 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.08 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 0.37 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -18.41 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

EPSmg $5.70
MG Growth Estimate 5.70%
MG Value $113.45
Opinion Overvalued
MG Grade D+
MG Value based on 3% Growth $82.64
MG Value based on 0% Growth $48.44
Market Implied Growth Rate 9.44%
Current Price $156.02
% of Intrinsic Value 137.52%

AvalonBay Communities Inc does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $4.13 in 2014 to an estimated $5.7 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 9.44% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into AvalonBay Communities Inc revealed the company was trading above its Graham Number of $84.91. The company pays a dividend of $5.68 per share, for a yield of 3.6%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 27.38, which was below the industry average of 51.63, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-56.36.

AvalonBay Communities Inc scores quite poorly in the ModernGraham grading system, with an overall grade of D+.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$56.36
Graham Number $84.91
PEmg 27.38
Current Ratio 0.37
PB Ratio 2.08
Current Dividend $5.68
Dividend Yield 3.64%
Number of Consecutive Years of Dividend Growth 6

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2017
Total Current Assets $234,592,000
Total Current Liabilities $632,776,000
Long-Term Debt $7,329,470,000
Total Assets $18,414,821,000
Intangible Assets $0
Total Liabilities $8,026,775,000
Shares Outstanding (Diluted Average) 138,248,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $4.26
Dec2017 $6.35
Dec2016 $7.52
Dec2015 $5.51
Dec2014 $5.21
Dec2013 $2.78
Dec2012 $4.32
Dec2011 $4.87
Dec2010 $2.07
Dec2009 $1.93
Dec2008 $5.17
Dec2007 $4.38
Dec2006 $3.42
Dec2005 $4.05
Dec2004 $2.92
Dec2003 $3.73
Dec2002 $2.23
Dec2001 $3.02
Dec2000 $2.53
Dec1999 $2.03
Dec1998 $1.84

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $5.70
Dec2017 $6.10
Dec2016 $5.68
Dec2015 $4.68
Dec2014 $4.13
Dec2013 $3.46
Dec2012 $3.75
Dec2011 $3.54
Dec2010 $3.05
Dec2009 $3.62
Dec2008 $4.31
Dec2007 $3.82
Dec2006 $3.45
Dec2005 $3.37
Dec2004 $2.99
Dec2003 $2.91
Dec2002 $2.45

Recommended Reading:

Other ModernGraham posts about the company

AvalonBay Communities Inc Valuation – May 2016 $AVB
AvalonBay Communities Inc. Annual Valuation – 2014 $AVB

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Disclaimer:

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.

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