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.
Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|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
|MG Growth Estimate||-0.15%|
|MG Value based on 3% Growth||$26.48|
|MG Value based on 0% Growth||$15.52|
|Market Implied Growth Rate||1.56%|
|% 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
|Number of Consecutive Years of Dividend Growth||0|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||12/1/2017|
|Long-Term Debt & Capital Lease Obligation||$2,125,235,000|
|Shares Outstanding (Diluted Average)||262,151,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$2.15|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$1.83|
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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.