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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 Macerich Co. fares in the ModernGraham valuation model.

MAC Chart

MAC data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. 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 - PASS
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price$60.67
MG Value$63.21
MG OpinionFairly Valued
Value Based on 3% Growth$31.28
Value Based on 0% Growth$18.34
Market Implied Growth Rate9.81%
NCAV-$40.69
PEmg28.12
Current Ratio0.41
PB Ratio2.59

Balance Sheet - 9/30/2013

Current Assets$183,500,000
Current Liabilities$445,800,000
Total Debt$4,492,800,000
Total Assets$9,205,500,000
Intangible Assets$546,600,000
Total Liabilities$5,908,900,000
Outstanding Shares140,720,000

Earnings Per Share

2013$3.53
2012$2.03
2011$1.46
2010$0.19
2009$1.83
2008$1.24
2007$0.98
2006$0.63
2005$0.80
2004$1.18
2003$1.68

Earnings Per Share - ModernGraham

2013$2.16
2012$1.43
2011$1.13
2010$0.97
2009$1.27
2008$0.99

Dividend History

MAC Dividend Chart

MAC Dividend data by YCharts

Conclusion:

Macerich Co. fares better than most REITs in the ModernGraham approach, and nearly qualifies for the Defensive Investor; however, the company's PEmg and PB ratios are too high for the investor type. The company fails the requirements of the Enterprising Investor due to its high level of debt relative to its current assets. Value investors seeking to follow the ModernGraham approach based on Benjamin Graham's methods should explore other opportunities through a review of 5 Low PEmg Companies for the Defensive Investor or 5 Undervalued Companies for the Enterprising Investor.

From a valuation perspective, the company seems to be fairly valued after growing its EPSmg (normalized earnings) from $0.99 in 2008 to $2.16 for 2013. This level of growth is in line with the market's implied estimate for earnings growth of 9.81%, leading the ModernGraham valuation model to return an estimate for intrinsic value that is within a margin of safety of the price.

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 Macerich Co.? 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 Macerich Co. (NYSE:MAC) 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.

Source: ModernGraham Annual Valuation Of Macerich Co.