- By GF Value
The stock of EastGroup Properties (NYSE:EGP, 30-year Financials) gives every indication of being 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 $155.07 per share and the market cap of $6.2 billion, EastGroup Properties stock shows every sign of being modestly overvalued. GF Value for EastGroup Properties is shown in the chart below.
Because EastGroup Properties is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 4.7% over the past five years.
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. EastGroup Properties has a cash-to-debt ratio of 0.00, which is in the bottom 10% of the companies in REITs industry. The overall financial strength of EastGroup Properties is 4 out of 10, which indicates that the financial strength of EastGroup Properties is poor. This is the debt and cash of EastGroup Properties over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. EastGroup Properties has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $372.3 million and earnings of $2.85 a share. Its operating margin is 35.49%, which ranks in the middle range of the companies in REITs industry. Overall, the profitability of EastGroup Properties is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of EastGroup Properties 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 EastGroup Properties is 4.7%, which ranks better than 74% of the companies in REITs industry. The 3-year average EBITDA growth rate is 3.5%, 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, EastGroup Properties's return on invested capital is 5.04, and its cost of capital is 5.29. The historical ROIC vs WACC comparison of EastGroup Properties is shown below:
Overall, The stock of EastGroup Properties (NYSE:EGP, 30-year Financials) shows every sign of being modestly overvalued. The company's financial condition is poor and its profitability is strong. Its growth ranks in the middle range of the companies in REITs industry. To learn more about EastGroup Properties stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.