The stock of QTS Realty Trust (NYSE:QTS, 30-year Financials) is estimated to be significantly 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 $64.2 per share and the market cap of $4.2 billion, QTS Realty Trust stock gives every indication of being significantly overvalued. GF Value for QTS Realty Trust is shown in the chart below.
Because QTS Realty Trust is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 3.6% over the past three years and is estimated to grow 9.23% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. QTS Realty Trust has a cash-to-debt ratio of 0.01, which ranks worse than 89% of the companies in REITs industry. Based on this, GuruFocus ranks QTS Realty Trust's financial strength as 3 out of 10, suggesting poor balance sheet. This is the debt and cash of QTS Realty Trust 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. QTS Realty Trust has been profitable 7 over the past 10 years. Over the past twelve months, the company had a revenue of $539.4 million and loss of $0.46 a share. Its operating margin is 12.98%, which ranks worse than 83% of the companies in REITs industry. Overall, the profitability of QTS Realty Trust is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of QTS Realty Trust over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of QTS Realty Trust is 3.6%, which ranks better than 67% of the companies in REITs industry. The 3-year average EBITDA growth is 11.5%, which ranks better than 81% 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, QTS Realty Trust's ROIC was 1.98, while its WACC came in at 2.60. The historical ROIC vs WACC comparison of QTS Realty Trust is shown below:
In conclusion, The stock of QTS Realty Trust (NYSE:QTS, 30-year Financials) gives every indication of being significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks better than 81% of the companies in REITs industry. To learn more about QTS Realty Trust stock, you can check out its 30-year Financials here.
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