Yahoo Finance Digital Realty Trust Stock Is Believed To Be Modestly Overvalued
- By GF Value
The stock of Digital Realty Trust (NYSE:DLR, 30-year Financials) appears to be modestly overvalued, 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 $151.18 per share and the market cap of $42.5 billion, Digital Realty Trust stock appears to be modestly overvalued. GF Value for Digital Realty Trust is shown in the chart below.
Because Digital Realty Trust is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 1.9% over the past three years and is estimated to grow 6.66% annually over the next three to five years.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Digital Realty Trust has a cash-to-debt ratio of 0.02, which is worse than 79% of the companies in REITs industry. GuruFocus ranks the overall financial strength of Digital Realty Trust at 3 out of 10, which indicates that the financial strength of Digital Realty Trust is poor. This is the debt and cash of Digital Realty Trust over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Digital Realty Trust has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $4.2 billion and earnings of $1.54 a share. Its operating margin is 17.33%, which ranks worse than 78% of the companies in REITs industry. Overall, GuruFocus ranks the profitability of Digital Realty Trust at 7 out of 10, which indicates fair profitability. This is the revenue and net income of Digital Realty Trust 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 performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Digital Realty Trust is 1.9%, which ranks in the middle range of the companies in REITs industry. The 3-year average EBITDA growth rate is 1%, which ranks in the middle range of the companies in REITs industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). 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. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Digital Realty Trust's ROIC was 1.97, while its WACC came in at 2.16.
Overall, the stock of Digital Realty Trust (NYSE:DLR, 30-year Financials) shows every sign of being modestly overvalued. 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 Digital Realty Trust stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
