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 Host Hotels and Resorts fares in the ModernGraham valuation model.
HST 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 - PASS
- 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 - FAIL
- 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 - PASS
- 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
|Value Based on 3% Growth||$0.51|
|Value Based on 0% Growth||$0.30|
|Market Implied Growth Rate||274.10%|
Balance Sheet - 12/31/2013
Earnings Per Share
Earnings Per Share - ModernGraham
HST Dividend data by YCharts
Host Hotels and Resorts is a better than average REIT, but still does not qualify for either the Defensive Investor or the Enterprising Investor. The company's poor earnings stability, lack of earnings growth, and high PEmg ratio are all disqualifying factors. As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham's methods should explore other opportunities, such as by reviewing a list of 5 Outstanding Dow Components.
From a valuation perspective, the earnings situation severely impacts the ModernGraham valuation model's view of the company. The company's EPSmg (normalized earnings) have gone from $0.34 in 2009 to $0.04 for 2013, and at the $0.04 level, the PEmg is through the roof. As a result, the ModernGraham valuation model indicates the company may 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 Host Hotels and Resorts? 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 Host Hotels and Resorts (NYSE:HST) 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.