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 General Growth Properties fares in the ModernGraham valuation model.
GGP data by YCharts
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
- Earnings Stability - positive earnings per share for at least 10 straight years - FAIL
- Dividend Record - has paid a dividend for at least 10 straight years - PASS
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
- Moderate PEmg ratio - PEmg is less than 20 - PASS
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
- Earnings Stability - positive earnings per share for at least 5 years - FAIL
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - FAIL
Balance Sheet - 9/30/2013
Earnings Per Share
Earnings Per Share - ModernGraham
GGP Dividend data by YCharts
Like most REITs, General Growth Properties does not appear suitable for either the Defensive Investor or the Enterprising Investor. The company has not had earnings stability or sufficient growth over the ten year historical period, and the current ratio is too low for the Defensive Investor. For the Enterprising Investor, the company lack of earnings stability and growth over the five year period, in addition to the debt level relative to the current assets are the deciding factors. Value investors following the ModernGraham approach based on Benjamin Graham's methods may wish to research over companies that pass these requirements by reviewing ModernGraham Stocks & Screens.
From a valuation perspective, the company fares very poorly in the ModernGraham valuation model due to the current year's negative EPSmg (normalized earnings). As a result, we are left to assume that any value in the company arises from the balance sheet, and it should be noted that the net current asset value (NCAV) is negative. Therefore, due to the poor earnings growth and the negative NCAV, the company appears to be overvalued presently.
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 General Growth Properties? Where do you see the company going in the future? Is there a company you like better?
Disclosure: The author did not hold a position in General Growth Properties (NYSE:GGP) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.