Empire State Realty OP LP (ESBA): An Underappreciated Gem in the Market?
Empire State Realty OP LP (ESBA) has seen a daily loss of -4.36%, but a 3-month gain of 19.74%. The company's Earnings Per Share (EPS) stand at 0.29. Is the stock modestly undervalued as it seems to be? This analysis aims to answer this question and provide a comprehensive understanding of the company's valuation. Let's delve into the details.
Company Overview
Empire State Realty OP LP is the operating partner of Empire State Realty Inc. The company, along with its partner, manages, operates, acquires, and repositions properties in Manhattan and the greater New York metropolitan area. The firm operates in two segments, Real Estate and Observatory. Through the Real Estate segment, it offers services related to the ownership, management, operation, acquisition, repositioning, and disposition of its real estate assets. Under the Observatory segment, it operates the two observatories of the Empire State Building. The company generates maximum revenue from the Real Estate segment. With a current stock price of $8.34 and a GF Value of $9.75, it seems the stock is modestly undervalued.
Understanding the GF Value
The GF Value is a unique measure that gives an overview of the fair value that the stock should be traded at. It is calculated based on historical multiples, a GuruFocus adjustment factor based on the company's past performance and growth, and future estimates of the business performance. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher. Currently, Empire State Realty OP LP (ESBA) is believed to be modestly undervalued with a market cap of $2.30 billion.
Given its relative undervaluation, the long-term return of Empire State Realty OP LP's stock is likely to be higher than its business growth.
Link: These companies may deliver higher future returns at reduced risk.
Financial Strength
Investing in companies with poor financial strength carries a higher risk of permanent loss of capital. Therefore, it is crucial to review the financial strength of a company before deciding to buy its stock. A good starting point for understanding a company's financial strength is looking at the cash-to-debt ratio and interest coverage. Empire State Realty OP LP has a cash-to-debt ratio of 0.14, which is better than 71.27% of 717 companies in the REITs industry. However, GuruFocus ranks the overall financial strength of Empire State Realty OP LP at 4 out of 10, indicating that its financial strength is relatively poor.
Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors. Higher profitability usually suggests a better investment compared to a company with lower profit margins. Empire State Realty OP LP has been profitable 8 out of the past 10 years. Over the past twelve months, the company had a revenue of $720.2 million and Earnings Per Share (EPS) of $0.29. Its operating margin is 19.18%, which ranks worse than 81.45% of 663 companies in the REITs industry. Overall, the profitability of Empire State Realty OP LP is ranked 7 out of 10, indicating fair profitability.
Growth is 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, it usually creates value for its shareholders, especially if the growth is profitable. Conversely, if a company's revenue and earnings are declining, the value of the company will decrease. Empire State Realty OP LP's 3-year average revenue growth rate is better than 59.9% of 631 companies in the REITs industry. Its 3-year average EBITDA growth rate is 6.9%, which ranks better than 63.98% of 533 companies in the REITs industry.
ROIC vs WACC
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Empire State Realty OP LP's return on invested capital is 3.54, and its cost of capital is 10.38.
Conclusion
In conclusion, the stock of Empire State Realty OP LP (ESBA) is believed to be modestly undervalued. The company's financial condition is poor, and its profitability is fair. Its growth ranks better than 63.98% of 533 companies in the REITs industry. To learn more about Empire State Realty OP LP stock, you can check out its 30-Year Financials here.
To find out the high quality companies that may deliver above average returns, please check out GuruFocus High Quality Low Capex Screener.
This article first appeared on GuruFocus.
