The stock of Extra Space Storage (NYSE:EXR, 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 $133.2 per share and the market cap of $17.8 billion, Extra Space Storage stock appears to be modestly overvalued. GF Value for Extra Space Storage is shown in the chart below.
Because Extra Space Storage is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 8.3% over the past five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Extra Space Storage has a cash-to-debt ratio of 0.02, which which ranks worse than 80% of the companies in REITs industry. The overall financial strength of Extra Space Storage is 3 out of 10, which indicates that the financial strength of Extra Space Storage is poor. This is the debt and cash of Extra Space Storage 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. Extra Space Storage has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $1.4 billion and earnings of $3.7 a share. Its operating margin of 47.78% in the middle range of the companies in REITs industry. Overall, GuruFocus ranks Extra Space Storage's profitability as strong. This is the revenue and net income of Extra Space Storage 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. Extra Space Storage's 3-year average revenue growth rate is better than 81% of the companies in REITs industry. Extra Space Storage's 3-year average EBITDA growth rate is 3.4%, 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, Extra Space Storage's ROIC was 7.07, while its WACC came in at 2.53. The historical ROIC vs WACC comparison of Extra Space Storage is shown below:
To conclude, Extra Space Storage (NYSE:EXR, 30-year Financials) stock gives every indication 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 Extra Space Storage stock, you can check out its 30-year Financials here.
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