The stock of CubeSmart (NYSE:CUBE, 30-year Financials) is believed 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 $38.77 per share and the market cap of $7.7 billion, CubeSmart stock shows every sign of being modestly overvalued. GF Value for CubeSmart is shown in the chart below.
Because CubeSmart is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 4.2% over the past 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. CubeSmart has a cash-to-debt ratio of 0.00, which ranks in the bottom 10% of the companies in REITs industry. Based on this, GuruFocus ranks CubeSmart's financial strength as 3 out of 10, suggesting poor balance sheet. This is the debt and cash of CubeSmart 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. CubeSmart has been profitable 9 years over the past 10 years. During the past 12 months, the company had revenues of $679.2 million and earnings of $0.85 a share. Its operating margin of 37.92% in the middle range of the companies in REITs industry. Overall, GuruFocus ranks CubeSmart's profitability as strong. This is the revenue and net income of CubeSmart 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 CubeSmart is 4.2%, which ranks better than 69% of the companies in REITs industry. The 3-year average EBITDA growth is 4.7%, which ranks better than 67% of the companies in REITs industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average 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 return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, CubeSmart's ROIC is 6.17 while its WACC came in at 3.20. The historical ROIC vs WACC comparison of CubeSmart is shown below:
In conclusion, the stock of CubeSmart (NYSE:CUBE, 30-year Financials) is estimated to be modestly overvalued. The company's financial condition is poor and its profitability is strong. Its growth ranks better than 67% of the companies in REITs industry. To learn more about CubeSmart stock, you can check out its 30-year Financials here.
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