Public Storage is facing negative news such as being downgraded, a price-gouging settlement, and an oversaturated market.
Book value for the past five years has actually been decreasing.
The company appears to be undervalued from a rearview mirror view, but future forecasts argue that it’s overvalued.
This article tells what investors could likely make in the future with Public Storage and what the real value is versus the current share price.
Public Storage (PSA) appears to be heading for trouble in the near future. This self-storage company and its industry have experienced steady growth over the past 10 years. But because of so much rapid growth, the market seems to be saturated and individual Public Storage locations are ultimately competing with each other. As a result, Bank of America has downgraded the company citing elevated supply and limited earnings vision for 2020. Other bad news facing the company includes a California settlement over claims of Public Storage's price-gouging tactics.
When considering these current stories about Public Storage, we need to determine which news topics will have a long-term and ongoing effect on the company and its share price. The oversaturated market causing PSA locations to compete against each other will likely have a long-standing effect on the company in a negative way.
While current news stories, good or bad can sway our opinion about investing in a company, it's good to analyze the fundamentals of the company and to see where it's been in the past and in which direction it's heading.
This article will focus on the long-term fundamentals of the company, which tend to give us a better picture of the company as a viable investment. I also analyze the value of the company versus the price and help you to determine if PSA is currently trading at a bargain price. I provide various situations which help estimate the company's future returns. In closing I will tell you my personal opinion about whether I'm interested in taking a position in this company and why.
Snapshot of the Company
A fast way for me to get an overall understanding of the condition of the business is to use the BTMA Stock Analyzer’s company rating score. It shows a score of around 86/100. Therefore, Public Storage is considered to be a good company to invest in, since 70 is the lowest good company score. PSA has high scores for 10 Year Price Per Share, ROE, Earnings per share, ROIC, and Gross Margin Percent. It has a low score for PEG Ratio. A low PEG Ratio score indicates that the company may not be experiencing high growth consistently over the past 5 years. In summary, these findings show us that PSA seems to have above average fundamentals since the majority of categories produce good scores.
Before jumping to conclusions, we’ll have to look closer into individual categories to see what’s going on.
(Source: BTMA Stock Analyzer )
Let’s examine the price per share history first. In the chart below, we can see that price per share has been mostly consistent at increasing over the last 10 years, with the exception of 2017-2018 when the price fell. Overall, share price average has grown by about 145.8% over the past 10 years or a Compound Annual Growth Rate of 10.51%. This is a decent return, but nothing spectacular. The important thing to notice is that the price growth per year is fairly consistent, which could mean that this company could be a stable investment if you don’t want to have many surprises.
(Source: BTMA Stock Analyzer – Price Per Share History)
Looking closer at earnings history, we see that earnings have grown consistently over the past 10 years. After falling in 2009, EPS has been on a strong uptrend through this past year besides a slight decline in 2017.
The key here is that PSA’s consistent earnings growth is reflected in its consistent share price growth. Consistent earnings make it easier to accurately estimate the future growth and value of the company. So in this regard, PSA is a good candidate of a stock to accurately estimate future growth or current value.
(Source: BTMA Stock Analyzer – EPS History)
Since earnings and price per share don’t always give the whole picture, it’s good to look at other factors like the gross margins, return on equity, and return on invested capital.
Return on Equity
The return on equity has been high and consistently increasing throughout the last 5 years. Five-year average ROE is good at around 23%. For return on equity (ROE), I look for a 5 year average of 16% or more. So PSA exceeds my requirements.
(Source: BTMA Stock Analyzer – ROE History)
Let’s compare the ROE of this company to its industry. The average ROE of 168 Business & Consumer Services companies is 20.11%.
Therefore, Public Storage’s 5-year ROE average of 22.9% and current ROE of 29.8% are above average.
Return on Invested Capital
The return on invested capital has been mostly stable and consistent over the last 5 years, except for 2017 when ROIC dropped. Five-year average ROIC is good at around 20%. For return on invested capital (ROIC), I also look for a 5 year average of 16% or more. So PSA passes this test as well.
(Source: BTMA Stock Analyzer – Return on Invested Capital History)
Gross Margin Percent
The gross margin percent (GMP) has been high and stable for the past five years. Five-year GMP is excellent at around 73%. I typically look for companies with gross margin percent consistently above 30%. So PSA has proven that it has the ability to maintain substantial margins over a long period.
(Source: BTMA Stock Analyzer – Gross Margin Percent History)
Looking at other fundamentals involving the balance sheet, we can see that the debt-to-equity is less than 1. This is a good indicator, telling us that the company owns more than it owes.
PSA’s Current Ratio of 1.22 is good, indicating that it has a good ability to use its assets to pay its short-term debt. Ideally, we’d want to see a Current Ratio of more than 1, so PSA exceeds this amount.
According to the balance sheet, the company seems to be in good financial health. In the long term, the company appears to be solid in regards to its debt-to-equity. In the short-term the company’s financial situation is also stable.
The Price-Earnings Ratio of 24.9 indicates that PSA might be selling at a high price when comparing PSA’s PE Ratio to a long-term market average PE Ratio of 15. The 10-year and 5-year average PE Ratio of PSA has typically been between 34.2 and 32.5, so this indicates that PSA could be currently trading at a low price when comparing to PSA’s average historical PE Ratio range.
PSA currently pays a dividend of 3.77% (or 3.83% over the last 12 months).
(Source: BTMA Stock Analyzer – Misc. Fundamentals)
The Story Behind The Dividend
In regards to dividend history, I’m first interested in knowing if the payout ratio is sustainable. At this time it’s around 94%, which means that there is very little room to grow the dividend, and the payout ratio should be watched since it’s approaching unsustainably high levels. Click here to enter text.
If we look at the dividend yield, we see a range of 2.62% to 3.95%. This stock pays out a decent dividend. Dividend yields have increased over the past 5 years, but not consistently. Therefore, this may not be an ideal stock for long-term dividend investors since payout ratios are very high and dividend yields haven’t increased consistently.
For investors interested in stocks that regularly do buybacks, notice that Public Storage does not regularly participate in share buybacks.
If I were currently interested in buying PSA now for the dividend, I would be trying to buy when the dividend yield was highest relative to its past. From the chart below, we can see that the dividend yield is near a somewhat high point relative to the past 10 years. Therefore, it’s a fairly good time to buy now if my priority is a better than average return through dividends.
Overall, the dividend situation with PSA is better than average. On the positive side, the stock pays a decent dividend. The dividend yield has been increasing over the years. Finally, the dividend yield is near a somewhat high level when compared with the past 10 years.
On the negative side, the payout ratio is approaching unsustainably high levels and should be watched. In addition, dividend yields have not been consistently increasing over the past 5 years.
This analysis wouldn’t be complete without considering the value of the company vs. share price.
Value Vs. Price
For valuation purposes, I will be using an adjusted diluted EPS of 8.46. I’ve used various past averages of growth rates and PE Ratios to calculate different scenarios of valuation ranges from low to average values. The valuations compare growth rates of EPS, Book Value, and Total Equity.
In the table below, you can see the different scenarios and in the chart, you will see vertical valuation lines that correspond to the table valuation ranges. The dots on the lines represent the current stock price. If the dot is towards the bottom of the valuation range, this would indicate that the stock is undervalued. If the dot is near the top of the valuation line, this would show an overvalued stock.
(Source: Wealth Builders Club)
According to this valuation analysis, PSA is undervalued.
- If PSA continues with a growth average similar to its past 10 years earnings growth, then the stock is undervalued at this time.
- If PSA continues with a growth average similar to its past 5 years earnings growth, then the stock is undervalued at this time.
- If PSA continues with a growth average similar to its past 10 years book value growth, then the stock is undervalued at this time.
- If PSA continues with a growth average similar to its past 5 years book value growth, then the stock is undervalued at this time.
- If PSA continues with a growth average similar to its past 5 years total equity growth, then the stock is undervalued at this time.
- According to PSA’s typical PE ratio relation to the S&P 500's PE Ratio, PSA is undervalued.
- If PSA continues with a growth average as forecasted by analysts, then the stock is overpriced.
This analysis shows an average valuation of around $250 per share versus its current price of about $211, this would indicate that Public Storage is undervalued.
According to the facts, Public Storage is financially healthy in a long-term sense in having enough equity as compared with debt, and in the short-term because the current ratio indicates that it has enough cash to cover current liabilities.
Other fundamentals are excellent, increasing, and consistent, such as ROE, ROIC, and EPS.
The dividend situation is better than average as the company pays a decent dividend with a yield that has been increasing and is near a 10 year high.
Lastly, this analysis shows that the stock is undervalued.
To get a good feel of how a stock performs in the long term, I like to compare it to the S&P 500 index. Below, we can see how PSA performed against the S&P 500 during the economic crisis of 2008 and years onward. You can see that PSA declined in a similar way to the S&P 500 during 2008/2009 and it experienced about the same amount of growth in the years that followed the recession. This tells me that PSA is likely to perform in a similar way to the market. Therefore, since the market is more diversified, it may be better to invest in a low-cost S&P 500 index fund than PSA, unless I was getting a screaming deal on bargain-priced shares of PSA.
“Over the next five years, the analysts that follow this company are expecting it to grow earnings at an average annual rate of 3.57%. This year, analysts are forecasting earnings increase of 1.93% over last year. Analysts expect earnings growth next year of 2.45% over this year's forecasted earnings.” (Source: Forecast Earnings Growth)
If you invest today, with analysts’ forecasts, you might expect about 3.57% growth per year. Plus we’ll add the current 3.77% forward dividend. This brings the annual return to around 7.34%.
Here is an alternative scenario based on PSA’s past earnings growth. During the past 10 and 5 year periods, the average EPS growth rate was about 9.32% and 10.01%, respectively. Plus the average 5-year dividend yield was about 3.83%. So we’re at a total return of 13.15 % to 13.84%. These higher returns of the past seem to be unlikely though, since the dynamics of this company seem to be changing. For example, during the past 10 and 5 year periods, the average book value has decreased by about 1% during both of these periods.
When considering cash flow growth over the past 10 and 5 years, the growth has been 1.0% and 3.5%, respectively. Plus the average 5-year dividend yield would give us a total return of 4.83% to 7.33%. Therefore, our annual return could likely be around 5%-7%.
If considering actual past results of Public Storage, which includes affected share prices, and long term dividend yields, the story is a bit different. Here are the actual 10 and 5 year return results.
10 Year Return Results if Invested in PSA:
Initial Investment Date: 12/03/2009
End Date: 12/03/2019
Cost per Share: $78.01
End Date Price: $211.94
Total Dividends Received: $58.20
Total Return: 246.29%
Compound Annualized Growth Rate: 13%
5 Year Return Results if Invested in PSA:
Initial Investment Date: 12/03/2014
End Date: 12/03/2019
Cost per Share: $186.13
End Date Price: $211.94
Total Dividends Received: $37.20
Total Return: 33.85%
Compound Annualized Growth Rate: 6%
From these scenarios, we have produced results from 6% to 13%. Since Public Storage seems to be losing book value, analysts are expecting decreased growth, and the more recent trend of returns is lower, I will err on the more conservative side.
I feel that if you’re a long-term patient investor and believer in PSA, and its existing service of self-storage, you could reasonably expect PSA to provide you with around 5%-7% long-term annual return. But for the short-term swing trader or impatient investor, you may be able to capitalize on some short-term gains of around 5% - 10% if you are able to buy PSA at a bargain price.
For me, the choice is certain. I would take an objective look at this company and realize that Public Storage has been a stable company with a business model that I’m interested in and I understand. I wouldn’t buy PSA at a fair price, because the near future doesn’t look too exciting in terms of growth and returns.
However, if the chance presents itself, I would be comfortable with buying it at a deep discount to capitalize on some short-term gains of 5% - 10%. If the stock would go down further after purchasing, I’d be OK with holding and collecting the dividend and waiting for the share price to climb back up, since I see this company continuing to be stable for at least the upcoming 5 years or more.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.