The stock of Extra Space Storage (NYSE:EXR, 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 $154.17 per share and the market cap of $20.6 billion, Extra Space Storage stock gives every indication of being significantly overvalued. GF Value for Extra Space Storage is shown in the chart below.
Because Extra Space Storage is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 8.3% over the past three years and is estimated to grow 3.28% annually over the next three to five years.
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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. Extra Space Storage has a cash-to-debt ratio of 0.01, which is worse than 88% of the companies in REITs industry. The overall financial strength of Extra Space Storage is 4 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:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Extra Space Storage has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $1.4 billion and earnings of $4.4 a share. Its operating margin is 48.32%, which ranks in the middle range of the companies in REITs industry. Overall, GuruFocus ranks the profitability of Extra Space Storage at 9 out of 10, which indicates strong profitability. This is the revenue and net income of Extra Space Storage 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 Extra Space Storage is 8.3%, which ranks better than 84% of the companies in REITs industry. The 3-year average EBITDA growth is 3.4%, which ranks better than 66% 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 7.13, while its WACC came in at 2.62. The historical ROIC vs WACC comparison of Extra Space Storage is shown below:
In conclusion, the stock of Extra Space Storage (NYSE:EXR, 30-year Financials) gives every indication of being significantly overvalued. The company's financial condition is poor and its profitability is strong. Its growth ranks better than 66% 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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