- By GF Value
The stock of Duke Realty (NYSE:DRE, 30-year Financials) appears 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 $44.965 per share and the market cap of $16.9 billion, Duke Realty stock is estimated to be modestly overvalued. GF Value for Duke Realty is shown in the chart below.
Because Duke Realty is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 7.2% over the past three years and is estimated to grow 5.46% annually over the next three to five years.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Duke Realty has a cash-to-debt ratio of 0.00, which is in the bottom 10% of the companies in REITs industry. GuruFocus ranks the overall financial strength of Duke Realty at 4 out of 10, which indicates that the financial strength of Duke Realty is poor. This is the debt and cash of Duke Realty 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. Duke Realty has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $1.1 billion and earnings of $0.96 a share. Its operating margin is 27.32%, which ranks worse than 70% of the companies in REITs industry. Overall, the profitability of Duke Realty is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of Duke Realty 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. Duke Realty's 3-year average revenue growth rate is better than 82% of the companies in REITs industry. Duke Realty's 3-year average EBITDA growth rate is 3.4%, which ranks better than 66% of the companies in REITs industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Duke Realty's return on invested capital is 3.35, and its cost of capital is 4.72. The historical ROIC vs WACC comparison of Duke Realty is shown below:
In summary, the stock of Duke Realty (NYSE:DRE, 30-year Financials) is believed to be modestly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks better than 66% of the companies in REITs industry. To learn more about Duke Realty stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.