- By GF Value
The stock of City Office REIT (NYSE:CIO, 30-year Financials) is estimated to be fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $11.09 per share and the market cap of $481.3 million, City Office REIT stock is believed to be fairly valued. GF Value for City Office REIT is shown in the chart below.
Because City Office REIT is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. City Office REIT has a cash-to-debt ratio of 0.03, which which ranks worse than 72% of the companies in REITs industry. The overall financial strength of City Office REIT is 3 out of 10, which indicates that the financial strength of City Office REIT is poor. This is the debt and cash of City Office REIT over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. City Office REIT has been profitable 4 years over the past 10 years. During the past 12 months, the company had revenues of $160.2 million and earnings of $1.03 a share. Its operating margin of 19.95% worse than 76% of the companies in REITs industry. Overall, GuruFocus ranks City Office REIT's profitability as fair. This is the revenue and net income of City Office REIT over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of City Office REIT is -1.1%, which ranks in the middle range of the companies in REITs industry. The 3-year average EBITDA growth rate is -5.4%, which ranks in the middle range of the companies in REITs industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, City Office REIT's return on invested capital is 2.79, and its cost of capital is 7.54. The historical ROIC vs WACC comparison of City Office REIT is shown below:
In closing, City Office REIT (NYSE:CIO, 30-year Financials) stock shows every sign of being fairly valued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in REITs industry. To learn more about City Office REIT stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.