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 Public Storage fares in the ModernGraham valuation model.
PSA 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 - PASS
- 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 - PASS
- 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 - FAIL
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- 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 - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - PASS
|Value Based on 3% Growth||$55.83|
|Value Based on 0% Growth||$32.73|
|Market Implied Growth Rate||17.61%|
|Net Current Asset Value (NCAV)||-$6.20|
Balance Sheet - 12/31/2013
Earnings Per Share
Earnings Per Share - ModernGraham
PSA Dividend data by YCharts
Public Storage does not qualify for either the Defensive Investor or the Enterprising Investor. For the Defensive Investor, the turn offs are the low current ratio and the high PEmg and PB ratios. For the Enterprising Investor, the issue is the high level of debt relative to the current assets. As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham's methods should explore opportunities through a review of 5 Undervalued Companies for the Defensive Investor or 5 Low PEmg Companies for the Enterprising Investor.
From a valuation perspective, the company appears to be overvalued after only growing its EPSmg (normalized earnings) from $2.70 in 2009 to $3.85 for 2013. This demonstrated level of growth does not support the market's implied estimate of 17.61% earnings growth, and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls well below 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 Public Storage Inc.? 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 Public Storage Inc. (NYSE:PSA) 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.