Starwood Property Trust Inc Valuation – March 2018 $STWD

Company Profile (obtained from Marketwatch): Starwood Property Trust, Inc. engages in originating, acquiring, financing, and managing commercial mortgage loans and other commercial real estate debt and equity investments. It operates through the following segments: Real Estate Lending; Real Estate Investing and Servicing, and Real Estate Property. The Real Estate Lending segment involves in providing a one-stop solution for borrowers and able to lend for balance sheet across the capital stack, including providing first mortgages, subordinate debt, mezzanine loans, and B-notes. The Real Estate Investing and Servicing segment offers commercial mortgage-backed securities and commercial real estate debt investing business. The Real Estate Property segment consists of real estate assets to complement its real estate lending and real estate investing and services segments. The company was founded on August 17, 2009 and is headquartered in Greenwich, CT.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of STWD – March 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 all 6 of the following tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $5,533,172,894 Pass
2. Earnings Stability Positive EPS for 10 years prior Fail
3. Dividend Record Dividend Payments for 10 years prior Fail
4. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 110.16% Pass
5. Moderate PEmg Ratio PEmg < 20 11.61 Pass
6. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.24 Pass
Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.
1. Earnings Stability Positive EPS for 5 years prior Pass
2. Dividend Record Currently Pays Dividend Pass
3. Earnings Growth EPSmg greater than 5 years ago Fail


Stage 2: Determination of Intrinsic Value

EPSmg $1.83
MG Growth Estimate -0.15%
MG Value $14.99
Opinion Overvalued
MG Grade C
MG Value based on 3% Growth $26.48
MG Value based on 0% Growth $15.52
Market Implied Growth Rate 1.56%
Current Price $21.20
% of Intrinsic Value 141.46%

Starwood Property Trust, Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability over the last ten years, and the poor dividend history. The Enterprising Investor has concerns regarding the lack of earnings growth over the last five years. 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 seeing its EPSmg (normalized earnings) decline from $1.84 in 2014 to an estimated $1.83 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 1.56% 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.

At the time of valuation, further research into Starwood Property Trust, Inc. revealed the company was trading below its Graham Number of $28.75. The company pays a dividend of $1.92 per share, for a yield of 9.1%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 11.61, which was below the industry average of 42.02, which by some methods of valuation makes it one of the most undervalued stocks in its industry.

Starwood Property Trust, Inc. receives an average overall rating in the ModernGraham grading system, scoring a C.

Stage 3: Information for Further Research

Graham Number $28.75
PEmg 11.61
PB Ratio 1.24
Dividend Yield 9.06%
TTM Dividend $1.92
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2017
Long-Term Debt & Capital Lease Obligation $2,125,235,000
Total Assets $62,941,289,000
Intangible Assets $323,529,000
Total Liabilities $58,462,875,000
Shares Outstanding (Diluted Average) 262,151,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $2.15
Dec2017 $1.52
Dec2016 $1.50
Dec2015 $1.91
Dec2014 $2.24
Dec2013 $1.82
Dec2012 $1.76
Dec2011 $1.38
Dec2010 $1.14
Dec2009 -$0.06

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $1.83
Dec2017 $1.71
Dec2016 $1.82
Dec2015 $1.92
Dec2014 $1.84
Dec2013 $1.50
Dec2012 $1.17
Dec2011 $0.75
Dec2010 $0.36
Dec2009 -$0.02

Recommended Reading:

Other ModernGraham posts about the company

Best Stocks Below Their Graham Number – August 2017
Starwood Property Trust Inc Valuation – April 2017 $STWD
10 Low PE Stock Picks for the Enterprising Investor – April 2017
10 Stocks for Using A Benjamin Graham Value Investing Strategy – March 2017
10 Best Dividend Paying Stocks for the Enterprising Investor – February 2017

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The author held a long position in STWD but did not hold a position 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.  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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