- By GF Value
The stock of PS Business Parks (NYSE:PSB, 30-year Financials) is estimated 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 $163.44 per share and the market cap of $4.5 billion, PS Business Parks stock shows every sign of being modestly overvalued. GF Value for PS Business Parks is shown in the chart below.
Because PS Business Parks is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 0.9% 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. PS Business Parks has a cash-to-debt ratio of 10000.00, which is better than 100% of the companies in REITs industry. The overall financial strength of PS Business Parks is 9 out of 10, which indicates that the financial strength of PS Business Parks is strong. This is the debt and cash of PS Business Parks over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. PS Business Parks has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $415.6 million and earnings of $4.53 a share. Its operating margin is 43.13%, which ranks in the middle range of the companies in REITs industry. Overall, the profitability of PS Business Parks is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of PS Business Parks over the past years:
Growth is probably one of the most important factors 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. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. PS Business Parks's 3-year average revenue growth rate is in the middle range of the companies in REITs industry. PS Business Parks's 3-year average EBITDA growth rate is 4.2%, which ranks better than 67% 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, PS Business Parks's ROIC was 9.28, while its WACC came in at 4.33. The historical ROIC vs WACC comparison of PS Business Parks is shown below:
In conclusion, the stock of PS Business Parks (NYSE:PSB, 30-year Financials) is estimated to be modestly overvalued. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 67% of the companies in REITs industry. To learn more about PS Business Parks stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.